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

Tax dodging, the Laffer curve, and the 50p rate

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:

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.

Tax dodging is an emotive issue. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The surprising truth about ingrowing toenails (and other medical myths)

Medicine is littered with myths. For years we doled out antibiotics for minor infections, thinking we were speeding recovery.

From time to time, I remove patients’ ingrowing toenails. This is done to help – the condition can be intractably painful – but it would be barbaric were it not for anaesthesia. A toe or finger can be rendered completely numb by a ring block – local anaesthetic injected either side of the base of the digit, knocking out the nerves that supply sensation.

The local anaesthetic I use for most surgical procedures is ready-mixed with adrenalin, which constricts the arteries and thereby reduces bleeding in the surgical field, but ever since medical school I’ve had it drummed into me that using adrenalin is a complete no-no when it comes to ring blocks. The adrenalin cuts off the blood supply to the end of the digit (so the story goes), resulting in tissue death and gangrene.

So, before performing any ring block, my practice nurse and I go through an elaborate double-check procedure to ensure that the injection I’m about to use is “plain” local anaesthetic with no adrenalin. This same ritual is observed in hospitals and doctors’ surgeries around the world.

So, imagine my surprise to learn recently that this is a myth. The idea dates back at least a century, to when doctors frequently found digits turning gangrenous after ring blocks. The obvious conclusion – that artery-constricting adrenalin was responsible – dictates practice to this day. In recent years, however, the dogma has been questioned. The effect of adrenalin is partial and short-lived; could it really be causing such catastrophic outcomes?

Retrospective studies of digital gangrene after ring block identified that adrenalin was actually used in less than half of the cases. Rather, other factors, including the drastic measures employed to try to prevent infection in the pre-antibiotic era, seem likely to have been the culprits. Emboldened by these findings, surgeons in America undertook cautious trials to investigate using adrenalin in ring blocks. They found that it caused no tissue damage, and made surgery technically easier.

Those trials date back 15 years yet they’ve only just filtered through, which illustrates how long it takes for new thinking to become disseminated. So far, a few doctors, mainly those in the field of plastic surgery, have changed their practice, but most of us continue to eschew adrenalin.

Medicine is littered with such myths. For years we doled out antibiotics for minor infections, thinking we were speeding recovery. Until the mid-1970s, breast cancer was routinely treated with radical mastectomy, a disfiguring operation that removed huge quantities of tissue, in the belief that this produced the greatest chance of cure. These days, we know that conservative surgery is at least as effective, and causes far less psychological trauma. Seizures can happen in young children with feverish illnesses, so for decades we placed great emphasis on keeping the patient’s temperature down. We now know that controlling fever makes no difference: the fits are caused by other chemicals released during an infection.

Myths arise when something appears to make sense according to the best understanding we have at the time. In all cases, practice has run far ahead of objective, repeatable science. It is only years after a myth has taken hold that scientific evaluation shows us to have charged off down a blind alley.

Myths are powerful and hard to uproot, even once the science is established. I operated on a toenail just the other week and still baulked at using adrenalin – partly my own superstition, and partly to save my practice nurse from a heart attack. What would it have been like as a pioneering surgeon in the 1970s, treating breast cancer with a simple lumpectomy while most of your colleagues believed you were being reckless with your patients’ future health? Decades of dire warnings create a hefty weight to overturn.

Only once a good proportion of the medical herd has changed course do most of us feel confident to follow suit. 

This article first appeared in the 20 April 2017 issue of the New Statesman, May's gamble

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