Tax and the coping classes

How the rich keep the Revenue at bay

I sometimes think my distinguished fellow columnist John Pilger exaggerates when he accuses the British press of suppressing various items of news. I wouldn't myself use such a strong verb. But it is hard to find any other description for what happened to this month's TUC report on tax avoidance (The Missing Billions). The Independent had it at the top of one of its early pages but, in most other papers, it was either ignored or buried deep in the business section. This was in a week when alleged waste and fraud in benefits were constantly in the headlines.

The report - by Richard Murphy, an accountant and tax specialist - shows the Treasury loses at least £25bn a year from tax avoidance, comprising £13bn by individuals and £12bn by the 700 largest corporations. A further £8bn is lost from "tax planning" (which I'll explain in a moment) by people earning more than £100,000 a year.

These are extraordinary figures. The £33bn total is nearly as big as the total UK income-related benefits bill (£36.6bn). It is more than four times as big as the amount (£8bn) the Institute for Fiscal Studies reckons the Chancellor needs to keep public sector debt under control. The institute's "green budget", published two days before the TUC report, warned of impending large tax rises. That, like benefit cheating, got wide coverage, no doubt sending what the Telegraph has dubbed "the coping classes" (an ingenious new term for the middle classes) into a panic.

If the government could get its hands on even half the £25bn lost to tax avoidance, it could raise the education budget by nearly 9 per cent and the health budget by nearly 5 per cent. With half of what it loses to tax planning, it could halve child poverty. The government will just waste it, you may say, increasing wages for inefficient doctors and teachers and throwing money at indolent single mothers. So let's look at it another way. Ministers could address tax avoidance and tax planning without removing incentives to work, save and invest, or starting some new crusade to redistribute from rich to poor.

On the contrary, they could cut the basic rate of income tax by 4p or raise the level at which 40 per cent tax is paid by more than £13,000. The tax system itself would simply come into line with what parliament intended.

Tax avoidance, it should be emphasised, is not tax evasion, which costs, according to the best estimates, a further £10bn a year. The latter is illegal. Avoidance is perfectly legal though, as Denis Healey once observed, the difference between the two "is the thickness of a prison wall".

Avoidance perverts the intentions of tax legislation, using artificial methods of adjusting your affairs without affecting their economic substance. For example, taxes on dividends and capital gains are usually less severe than those on earned income so as to encourage investment in productive and job-creating activity. But many people convert earned income into unearned income - often by setting up companies that employ nobody but themselves - purely in order to reduce tax bills. Similarly, big companies alter the timing and location of transactions purely to defer or avoid tax payments. Despite the constant corporate whining about levels of UK taxation, the various avoidance devices leave the big companies paying the second-lowest effective tax rate in western Europe.

Where avoidance is of dubious morality, because it deliberately makes opaque what ought to be transparent, tax planning is entirely above board. But Murphy argues that it can nevertheless pervert parliament's intentions. The wealthy take advantage of allowances for savings and investments (some of them are used for "buy-to-let" property purchases), even though they don't need incentives to save in the first place. The result is that almost everybody with an income of more than £50,000 a year pays roughly the same proportion of their overall income in tax (30 per cent). Murphy proposes that people earning more than £100,000 should pay a minimum of 32 per cent tax on their overall income, rising to 40 per cent once they reach £200,000.

Murphy has various proposals for closing the loopholes that allow tax avoidance. What we need above all, though, is a change in language.

When newspapers and politicians refer to "taxpayers' money", they imply that the government is in some sense stealing it and that anybody who manages to avoid payment is keeping money that is rightfully their own. The reality is that governments collect taxes to allow them to carry out a democratic mandate. The tax avoiders not only frustrate the will of the majority, they also shift on to them a disproportionate share of the cost of public services. Surely this is a message that can be sold to the coping classes.

Last week's column stated that the annual cost of benefit fraud was down to £800,000. That should have been £800m. Apologies.

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 11 February 2008 issue of the New Statesman, Now it gets really dirty