@richardjmurphy\’s new report

On tax evasion around the world.

Impressive number crunching but sadly there\’s a logical hole in it.

His method has been to take the average tax rate, the size of the shadow economy and then multiply one by the other to give the amount of tax evasion.

But that is making the assumption that all of that economic activity would have taken place if it were fully taxed.

Which is an entirely unwarranted assumption. In fact, it\’s not just unwarranted, it\’s an entirely incorrect assumption.

It is absolutely true that some portion of that economic activity simply would not exist if it were taxed in full at the usual rates.

We even have estimates for what this is: it\’s the deadweight cost of taxation. Which is, by definition, the economic activity that does not take place because we\’ve slapped a tax on it.

A reasonable rule of thumb is that the average deadweight cost is around 20%. That is, £1 raised in tax causes a contraction of 20 p in economic activity. That\’s a US, therefore pretty low tax, sort of place too. The marginal effect is thought to be more like 30%, again a US number.

And of course, we would expect the effect on those things that are already being done to dodge tax to be higher. For people are already taking the risk of fines and prisons to indulge in that economic activity but free from tax.

Wouldn\’t be at all surprised to find that the marginal deadweight cost of taxing those economic activities which are already dodging tax is well over 50%. Would be surprised but not shocked if it were over 75%.

So, take the numbers he\’s giving with a pinch of salt.

24 thoughts on “@richardjmurphy\’s new report”

  1. Let me get this right Tim.

    Only 75% of a crime is OK with you. Is that what you’re saying?

    It seems to be.

    And it fairly nails your collars to the mast.

    Not that I actually agree with your analysis, at all.

  2. “Tax Revenue = (Tax base * Tax rate)” is one of the oldest fallacies in public economics.

    And “Richard Murphy”, your reading comprehension is appalling. Try again.

  3. But the nails won’t do the weave any good.

    Anyway, don’t you send your collars off to be properly starched?

  4. Talking of pinches of salt, I tend to require a large one when reading arguments purporting to be expert views, but constructed entirely on a “reasonable rule of thumb”.

  5. “Only 75% of a crime is OK with you. Is that what you’re saying?”

    Sigh! You purport to know a thing or two about tax, yet struggle to read plain English. 75% is the supposed marginal dead weight cost, not the percentage of crime that has been committed. Where the figure is correct is neither here not there, it clearly refers to the marginal dead weight cost hence:

    “the marginal deadweight cost of taxing those economic activities which are already dodging tax is well over 50%. ”

    To go from the above to claiming that it refers to the percentage of a crime that is being committed makes you either thick, or dishonest (or both).

  6. I think the most important part of Richard Murphy’s comment above is that as usual he resorts to ad hominem attacks rather than debating the issue.

    It is the work of the intellecually lazy and dishonest to play the man and not the ball.

    Well done you cretin (note: irony)

  7. “collars to the mast”! sweet.

    is RM really calling informal economic activity in poor countries “criminal”? Oh dear.

    But on this one, Tim is I think wrong because of course he is forgetting what those taxes could buy, if paid, and what they could buy is better functioning states, supporting the market economy.

    If you thinking about a counterfactual in which taxes are paid but the quality of governance and economic institutions does not improve, you are accounting for costs and no benefits, so you find a negative effect. But all the evidence shows that larger formal sectors are accompanied by better states (causation flowing in both directions) .

    Don’t take my word for it – read this book, and see what the data reveals.

    Asking “what would happen if the informal economy was fully taxed” is the same as asking what would happen if the informal sector shrank and the formal sector grew, and as anybody who pays any attention to development economics knows, growing the formal sector is universally seen as the way to increase economic activity and achieve growth – the dead weights costs of taxation are outweighed by the benefits of operating under stronger states.

  8. Has any one noticed,

    How Mr Murphy writes in truncated sentences?

    Like a sanctimonious Haiku.

    Usually ending in baseless self-congratulation,

    Or accusing another of being a deluded ‘neo-liberal’.

  9. The report is amazingly slapdash.

    Look at the methodology. They take the very rough estimates of the black/informal/shadow economy in different countries, apply the average effective tax rate to the economy, and then announce that the resultant figure represents tax evasion, and therefore missing tax to be collected.

    This is breathtaking. First, in much of the world the black economy is little to do with tax evasion. In the developing world, Russia, China etc it is more commonly driven by bureaucracy and bribes that accompany the “official” economy and make it impossible for normal people to operate in it. Closing down the shadow economy in these countries – even if it were possible – would be a disaster for many hundreds of millions of impoverished people. The progressive approach is to look at why the shadow economies in these countries are so large, and how this can be fixed without wealth transfers from the poorest to government officials.

    In the West things are of course different, and often the shadow economy consists of cash in hand payments that are motivated by tax evasion. But two problems here. First, the nature of the small businesses/individuals that do this mean that it’s daft to assume they’d be as profitable, and pay as much tax, as the economy as a whole. Second, whilst it would be great for all sorts of reasons to reduce the size of the shadow economy, how much scope is there really to do this? Even Scandinavia doesn’t get down to single figure %s, and the UK has one of the smallest shadow economies in the world. Could we reduce our shadow economy by a few % and collect a few £bn? Perhaps. Could we eliminate it and get that £69bn? A ridiculous suggestion.

    And then comes the breaktaking dishonesty of conflating the informal/shadow economy with the kind of tax avoidance large business engages in. The TJN report does this by implication, and the author of this blog has fallen for it. In reality they are two entirely different issues. The GAAR may reduce avoidance, but won’t touch evasion. Making cash transactions more difficult would reduce evasion,but wouldn’t touch avoidance.

    It would be helpful and honest for the author of the blog to take another look at the report.

  10. “And it fairly nails your collars to the mast”. Brilliant. I think he means Tim reveals his true collars, at the masthead or even possibly headmaster, nailingly. Running rings around his collars?

  11. @ChrisM Heuristics can be useful but have their limitations. Let me give you an example.

    As a self-employed artist, there is a rule of thumb as to what percentage of my income I should be putting aside over the year, to cover my tax liability at the end of the year. This has been useful, in my case, broadly correct and has served me well.

    However, I could then go on to construct an argument based on this rule of thumb, which suggests that most artists probably do this, therefore multiplying that percentage with the average artist’s income and the number of artists in the UK you will get the figure for money being put aside each year. My conclusion would be unreliable.

    These are all educated guesses. We all get that, right? Each person will instinctively find one to be more educated than another.

    In the same way, instinctively, I find arguments that suggest tackling tax evasion may be uneconomical are problematic, because they ignore broader issues.

    Looked at through this narrow lens, it would be more economical for the police not to investigate burglaries in which stolen goods are of lesser value than the cost of the investigation. This, however, ignores how such an attitude might affect burglary rates, the message it sends to victim and perpetrator and the more general erosion of the Rule of Law.

    I believe similar arguments apply to tackling tax evasion. Note – I believe. I don’t purport to know. It is just my opinion that the balance of fairness in a civilised society is more than a mathematical equation.

  12. @Alex It is precisely in those cases where something cannot be reduced to mathematical equations or an exact unequivocal answer given that we rely on a rule of thumb. Where an equation exists, or some algorithm or other analysis, there is no need for rule of thumb.

    (Fairness of course has nothing to do with maths as it is entirely subjective, nor has anyone on this thread claimed it has. Everyone believes in fairness, they just don’t all agree on what is fair.)

  13. On the matter of police investigating crimes, the police are not immune from economic considerations. As you point out, there are other costs associated with NOT investigating a crime, so indeed the police may well spend £1000 investigating a £100 crime. I suspect however, they would not spend £1,000,000 investigating £100 crime.

  14. Yet some crimes that we will all insist on having investigated will have minimal economic impacts. In fact, you could argue (if you were a hideously immoral neo-liberal*) that machine-gunning the residents of an OAPs’ home would be economically positive. All that inheritance tax to the state, few fees to pay, a valuable building released back to more productive use.

    Note – even for hideously immoral neo-liberals, please don’t try this outside Gedankenexperiment-land. You’d probably find it hard to get hold of a suitable machine gun, anyway.

  15. Oh dear, Richard! Collar me stupid, but Tim’s counter-analysis seems to be as heuristic as yours, but logically closer to reality. Even viewed through your collar-of-rose-tinted glasses, tax avoidance is not a crime, morally or ethically.

  16. That’s spectacular. Our Murph might as well have asked whether you think fishmongers ought to wear spats on Tuesdays. It would be about as relevant, and would make somewhat more sense.

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