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.

Anoosh Chakelian
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“We need an anti-Conservative force”: Nick Clegg wants to work with Labour after the election

On the campaign trail in Sheffield Hallam, the former Deputy Prime Minister talks about how to challenge Brexit and the “Boudicca” Theresa May.

It’s pouring with rain and Nick Clegg has forgotten his coat. “It was so nice this morning,” he groans, looking doubtfully down at his outfit – a navy v-neck, pale shirt, rumpled blue blazer and dark trousers with some dried dirt splattered on the ankles. Yesterday evening, he and his team of activists had decamped to a pub after the rain became too heavy for doorknocking.

We are taking shelter in the Lib Dem campaign office in Sheffield (this interview took place before the Manchester attack). Teetering towers of envelopes and flyers, rubber bands and canvass papers enclose a handful of volunteers sipping tea and eating mini flapjacks. Giant diamond-shaped orange placards – “Liberal Democrats Winning Here” – are stacked against every spare bit of wall.

Clegg has represented Sheffield Hallam, a largely affluent and residential constituency on the west edge of the south Yorkshire city, for 12 years. It has stayed with him throughout his “Cleggmania” popularity as Lib Dem leader in opposition and his difficult days as Deputy Prime Minister in coalition with the Tories. Now he hopes to win it over as a vocal anti-Brexit champion.

After a relentless campaign by the local Labour party in a bid to “decapitate” the Lib Dems in 2015, Clegg’s majority fell from 15,284 to 2,353. He is hoping Labour is unable to further chip away at his support this time round.

“I’m confident but I’m not complacent,” he tells me, nursing a cup of tea as we wait to go canvassing. He believes voters who punished him last time – for going into government with the Conservatives, and breaking his tuition fees pledge – are changing heart.

“I was a target with a great big cross on me,” he says, tracing across himself with his finger. “I personally always think it was this odd cartoon caricature both made of me but also of how people view me... People stop listening to what you have to say – I distinctly was aware at one point when I literally could’ve said ‘Baa Baa Black Sheep’ and it would’ve made no difference. Whereas now, people are very keen to listen again.

“Those who were critical in the past now take a more nuanced view, perhaps, than they did of what I’ve tried to do in politics, and feel I have a role to play in the big debate on Brexit.”

“I was a target with a great big cross on me”

Even when he’s not raging against Brexit, Clegg exudes Proud European. He uses a Norwegian weather app – “they’ve invented something better than the BBC one!” – on his phone (which appears to have failed him today), and keeps stifling yawns because he was up until 2am reading a Hungarian novel called Portraits of a Marriage. “I really recommend it. It’s by Sándor Márai,” he tells me, eagerly spelling out his name. “Of course, I’m reading it in translation.”

Although Sheffield Hallam voted Remain as a constituency (calculated at about 65 per cent), Clegg is still having trouble with his anti-Brexit message among voters. “It’s a very British attitude,” he smiles. “Lots of people who voted Remain sort of say, ‘oh, come on’. The phrase I keep hearing is: ‘We’d better make the best of it.’”

We encounter this attitude when out doorknocking in Lodge Moor, Fullwood, on the rural edge of the constituency. The streets we visit are inhabited by elderly couples and families in detached bungalows with low, steep rooves and immaculate driveways, and rows of whitewashed semi-detached houses.

One father opens the door, as his young son drags an overzealous yellow labrador away from the threshold. He is an occupational therapist and his wife is a teacher. They also have a child with special needs. Although “Brexit’s a bit of a stress”, he says his family’s priorities are education and the NHS. “I haven’t made my mind up who to vote for,” he tells Clegg. “I do know that I won’t be voting Conservative, but I want to vote for an independent.”

“I’m very keen on staying in Europe but I can’t see a way around it,” says a retired man with fine white hair in a scarlet jumper who lives on the road opposite. Clegg counters: “It may all be too late, it may all be hopeless, but I wouldn’t underestimate how public opinion may shift.” The man will vote Lib Dem, but sees battling Brexit as futile.

“Labour’s days as a party of national government have ended”

“The frustrating thing for us, as Lib Dems” – Clegg tells me – “is I would lay a fairly big wager that it will be precisely those people who will then say in a year or two’s time that this Brexit’s an absolute nonsense,” though he does admit it’s “politically tough” for his party to make Brexit central to its campaign.

“It would be much better if you were leader,” the retired man’s wife chips in, pulling on a blue cardigan as she joins them at the doorway. “Tim [Farron] – he’s a nice man, but he’s not quite the same.”

Clegg as an individual gets a lot of love at almost every doorstep. “You should come to Knit and Natter,” beams one woman involved in the local church. “You don’t have to knit – as long as you can natter!”

When I ask whether he feels nostalgic for Cleggmania, Clegg says he does not “hanker after past glories”. He does, however, miss being in government – and compares Theresa May’s current persona with the woman he knew and worked with in cabinet.

“She has been converted from what I found to be a rather conventional, not wildly exceptional politician by the sort of hysterical sycophancy of the Daily Mail and others into this colossal political figure, this sort of Boudicca,” he splutters. “I’m sure she would say this about herself – she has very little peripheral vision. She’s not an innovative politician. She’s not a big picture politician.”

Although Lib Dem leader Tim Farron has ruled out coalition deals with May’s Conservatives and Jeremy Corbyn’s Labour, Clegg urges his party to work with Labour following the election. “The Labour party is still operating under this illusion that it can win an election – it can’t!” he cries. “It’s irrelevant who’s leader. It doesn’t matter whether it’s Jeremy Corbyn or David Miliband – there is no way that the Labour party can beat the Conservatives under this electoral system . . . It’s impossible.”

“I am self-evidently a pluralist – why else would I go into coalition?”

He believes that because the “pendulum of politics” is stuck on the right that “we can’t continue with business-as-usual after 8 June”.

“If we all just carry on talking to ourselves in our own rabbit hutches, all that will happen is we will carry on with this dreary, soulless, almost perpetual one-party domination by the Conservatives,” he warns. “The dam needs to break within the Labour party, and the moment they understand that they can never win again – that their days as a party of national government have ended – can you start thinking about how to mount a proper challenge to Conservative hegemony.”

Clegg clearly wants an active role in future cooperation. “I am self-evidently a pluralist – why else would I go into coalition?” he asks. “I’ll always be happy to play my part in doing what I think is right, which is that we need a proper anti-Conservative force or forces in British politics.”

Labour’s campaign in Sheffield Hallam is not spooking local Lib Dems as much as in 2015, when it was polling ahead of them in the build-up to the election. Concerns about Corbyn’s leadership and Labour’s vote in favour of Article 50 appear to have dented its once surging support here.

“I’m voting Lib Dem,” declares a middle-aged man in big aviator-framed glasses and a silver chain, opening the door and looking distinctly unimpressed. “But not because it’s you.”

“Ah,” grins Clegg.

“I’m voting Lib Dem because I don’t want Labour in. I don’t want anybody in at the moment; I don’t like anybody’s politics,” he rumbles. “But it made me cringe when I heard Corbyn speak. Because he’s got the giant-sized ripe-flavoured carrots out, and people don’t realise they’ve got to pay for them.”

Clegg will be relying on such voters to keep his seat. But even if he doesn’t win, don’t expect him to disappear from political life until the Brexit negotiations have well and truly concluded. “It would be a dereliction of duty to the country to fall in line with the conspiracy of silence on the terms of Brexit both Labour and the Conservatives are trying to smother this election campaign with,” he says. “It’s the question of the day.”

Anoosh Chakelian is senior writer at the New Statesman.

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