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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I'd only given a literary talk, but someone still told me to leave the country

“So if you don’t like it so much,” he says, “why don’t you leave?” And his tone suggests that there is a good train leaving from St Pancras in half an hour.

So here I am at the Romanian Cultural Institute in Belgrave Square. Eventually. After a misunderstanding that finds me first, forlorn and bemused, at Olympia, with the London Book Fair closing down for the evening, watching my fee grow wings and fly away into the night air. I am called up and told where I could more profitably go instead – that is to say, the venue I should be at. On reassurance that my expenses will be met, I hop into a cab as soon as I find one (which, on Kensington High Street at 7pm, takes far longer than you would think. I will not use Uber).

I am going there in order to be on a panel that is talking about Benjamin Fondane (1898-1944), the Romanian intellectual, poet, essayist, philosopher and all-round dude. I know nothing about the guy beyond what I learned from reviewing a selection of his writings last July but this makes me, apparently, one of this country’s leading experts on him. Such is the level of intellectual curiosity in this part of the world. Fondane was treated much better in Paris, where he moved after finding studying law in Bucharest too boring; treated very much worse in 1944, when he was sent to Auschwitz.

A little corner of me is panicking a bit before the gig starts: I know next to nothing about the man, especially compared to my co-panellists, and I might betray this to the audience of around 80 (I refer to their number, not their age), sitting in their little gilt chairs, in a nice gilt drawing room, which is par for the course for European cultural institutes in this neck of the woods.

Another part of me says: “Don’t be silly, you’ll be fine,” and it turns out I am. I even manage to throw in a few jokes. During the course of one of my answers I say that the UK is a cultural desert and that there was a reason Fondane stopped moving when he got to Paris. The idea of coming to London to breathe the pure air of artistic freedom and inspiration was, and remains, laughable. It gets a chuckle or two out of the (mostly Mittel-European) audience, who like a bit of British self-deprecation as much as we do.

Or do we? Downstairs, and clutching my first glass of the evening (a perfectly drinkable Romanian Merlot), I chat to various people who come up and say they like my reviews etc, etc. All very pleasant. And then a man comes up to me, about my age, maybe a year or three younger, smartly tweeded.

“I was very offended by what you said about this country being a cultural desert,” he says. He is not joking.

“Oh?” I say. “Well, it is.”

He has the look of someone about to come up with a devastating argument.

“What about Shakespeare?” he asks me. “What about Oscar Wilde?”

“They’re dead,” I say, leaving aside the fact that Wilde was Irish, and that anywhere was better than Ireland in the 19th century for gay playwrights.

“So’s Fondane,” he says.

I think at this point I might have raised my glasses and massaged the bridge of my nose with finger and thumb, a sign for those who know me of extreme exasperation, and a precursor to verbal violence.

“So if you don’t like it so much,” he says, “why don’t you leave?” And his tone suggests that there is a good train leaving from St Pancras in half an hour.

“Do not presume to tell me, sir, whether I should leave the country.”

He tells me he has a Polish wife, as if that has any bearing on the matter. He says something else, which for the life of me I can’t remember, but I do know that when I replied to it, I used only one word, and that the word was “bollocks”.

“Well, if you’re going to use bad language . . .”

“I’ve got more,” I say, and proceed to launch a volley of it at him. Things have escalated quickly, I know, but there is no jest in his tone and what I am detecting is, I realise, his strong awareness of the Z in my name, my nose, and my flawless olive complexion. One develops antennae for this kind of thing, after almost half a century. And there’s a lot more of it about these days.

In the end, I become pretty much incoherent. On stage I’d caught myself thinking: “Golly, talking is even easier than writing;” but now my fluency deserts me. But God, it’s fun getting into a fight like this.

I’ve left my tobacco at home but the Romanian government gives me a whole pack of Marlboro Gold, and more wine. Vata-n libertate ori moarte! As they say. You can work it out. 

Nicholas Lezard is a literary critic for the Guardian and also writes for the Independent. He writes the Down and Out in London column for the New Statesman.

This article first appeared in the 23 March 2017 issue of the New Statesman, Trump's permanent revolution