Why is tax avoidance a reason for letting people off tax?

The reason given for cutting the 50p rate of tax to 45p was avoidance. It wasn't clearly phrased as such - most of the talk was about how it had raised less money than expected, or had changed behaviour in ways that harmed growth - but that is what it was nonetheless. To many, this will seem strange. "You avoided tax, so we will make you pay less". But it is an integral part of the line of thought that lies behind the cut.

Art Laffer first made the argument that cutting tax rates could boost revenue. The reasoning is broadly that, when the marginal tax rate (the amount you pay on each extra pound earned) gets too high, people start doing things to reduce their taxable income.

The palatable version is that they work less, because an extra hour of work no longer pays as well as it did, and this is probably true; there are certainly anecdotal tales of highly paid consultants turning down work later on in the year to spend more time at home.

The less palatable version is that they avoid more tax, because spending the money and effort required to set up a limited company, be paid "overseas", or funnel your income through a Swiss bank account in the name of your dog becomes more worthwhile the more it saves you.

Both of these "behavioural changes" are factored in to the Laffer curve, the rough prediction of how much revenue will be gained at various marginal tax rates. HMRC produced three such curves, each based around a different "taxable income elasticity" (TIE), a measure of how much an individual's behaviour changes given the tax rate:

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They based their analysis around a TIE of 0.45 (a figure basically plucked from thin air - HMRC admit the evidence to choose is "extremely limited", and the studies they cite range from -0.6 to 2.75), which showed a peak of revenue at around 48 per cent. Quite why this then led the Chancellor to cut the rate to three per cent below that is unclear. If he wanted to raise revenue, his own analysis is showing that he's done it wrong.

The problem is, one thing which affects the TIE is the ease with which one can avoid tax. Make tax avoidance harder, TIE goes up, and the peak revenue rate increases. In fact, given the anti-avoidance measures announced at the budget yesterday, TIE will already be higher than it was at the time of the analysis, boosting the argument for keeping the 50p rate.

There is one massive category of avoidance which can't be cited as a reason for cutting the rate, however. The HMRC's stats show that £6.6bn less income was declared in 2010-11 due to it being "forestalled" - paid the year before, so as to take advantage of the lower rate. This is avoidance on a massive scale (Richard Murphy points out that it is £1.6bn more than the estimation for all tax avoidance in 2011), yet, contra Tim Worstall, it has no bearing on the decision on whether or not to cut the rate, because it can only ever be done once.

By cutting the tax so early in its life, Osborne has ensured that we make the decision unable to know the full effect of cutting it. We can guess at how much will have been raised for the 2011-12 tax year, when forestalling was harder (although not impossible, and HMRC warn that it "continues to reduce revenues in 2011-12 and beyond"), but by the time we know for sure, it will be too late. The 45p tax will be in, and there won't be a "normal" year of the 50p rate to compare it to.

Paul McMillan
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"We're an easy target": how a Tory manifesto pledge will tear families apart

Under current rules, bringing your foreign spouse to the UK is a luxury reserved for those earning £18,600 a year or more. The Tories want to make it even more exclusive. 

Carolyn Matthew met her partner, George, in South Africa sixteen years ago. She settled down with him, had kids, and lived like a normal family until last year, when they made the fateful decision to move to her hometown in Scotland. Matthew, 55, had elderly parents, and after 30 years away from home she wanted to be close to them. 

But Carolyn nor George - despite consulting a South African immigration lawyer – did not anticipate one huge stumbling block. That is the rule, introduced in 2012, that a British citizen must earn £18,600 a year before a foreign spouse may join them in the UK. 

“It is very dispiriting,” Carolyn said to me on the telephone from Bo’ness, a small town on the Firth of Forth, near Falkirk. “In two weeks, George has got to go back to South Africa.” Carolyn, who worked in corporate complaints, has struggled to find the same kind of work in her hometown. Jobs at the biggest local employer tend to be minimum wage. George, on the other hand, is an engineer – yet cannot work because of his holiday visa. 

To its critics, the minimum income threshold seems nonsensical. It splits up families – including children from parents – and discriminates against those likely to earn lower wages, such as women, ethnic minorities and anyone living outside London and the South East. The Migration Observatory has calculated that roughly half Britain’s working population would not meet the requirement. 

Yet the Conservative party not only wishes to maintain the policy, but hike the threshold. The manifesto stated:  “We will increase the earnings thresholds for people wishing to sponsor migrants for family visas.” 

Initially, the threshold was justified as a means of preventing foreign spouses from relying on the state. But tellingly, the Tory manifesto pledge comes under the heading of “Controlling Immigration”. 

Carolyn points out that because George cannot work while he is visiting her, she must support the two of them for months at a time without turning to state aid. “I don’t claim benefits,” she told me. “That is the last thing I want to do.” If both of them could work “life would be easy”. She believes that if the minimum income threshold is raised any further "it is going to make it a nightmare for everyone".

Stuart McDonald, the SNP MP for Cumbernauld, Kilsyth and Kirkintilloch East, co-sponsored a Westminster Hall debate on the subject earlier this year. While the Tory manifesto pledge is vague, McDonald warns that one option is the highest income threshold suggested in 2012 - £25,700, or more than the median yearly wage in the East Midlands. 

He described the current scheme as “just about the most draconian family visa rules in the world”, and believes a hike could affect more than half of British citizens. 

"Theresa May is forcing people to choose between their families and their homes in the UK - a choice which most people will think utterly unfair and unacceptable,” he said.  

For those a pay rise away from the current threshold, a hike will be demoralising. For Paul McMillan, 25, it is a sign that it’s time to emigrate.

McMillan, a graduate, met his American girlfriend Megan while travelling in 2012 (the couple are pictured above). He could find a job that will allow him to meet the minimum income threshold – if he were not now studying for a medical degree.  Like Matthew, McMillan’s partner has no intention of claiming benefits – in fact, he expects her visa would specifically ban her from doing so. 

Fed up with the hostile attitude to immigrants, and confident of his options elsewhere, McMillan is already planning a career abroad. “I am going to take off in four years,” he told me. 

As for why the Tories want to raise the minimum income threshold, he thinks it’s obvious – to force down immigration numbers. “None of this is about the amount of money we need to earn,” he said. “We’re an easy target for the government.”

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

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