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.