Doesn’t make sense

So, the tax gap.

The Government’s claim that £31billion of taxes go uncollected each year is based on a misleading algorithm created for the American tax system, it can be revealed.

Revenue & Customs is now working on major changes to the calculation which could see the figures altered radically – up or down.

OK, interesting.

But there is disquiet that the use of US software could be giving a very misleading picture as America and Britain have quite different tax systems.

In the US, almost everyone fills out their own tax return, in contrast to Britain’s PAYE system that taxes salaries before money is transferred to bank accounts.

Idiocy. You think they don’t have withholding in the US?

24 thoughts on “Doesn’t make sense”

  1. o UK uses software developed by Internal Revenue Service to calculate tax gap
    o Revenue & Customs is now working on major changes to the calculation

    Modeling. Next thing they’ll tell us is sea level will rise 7 meters by 2100.

  2. Has anyone else noticed that “algorithm” is en route to becoming a scare-word, much as “herd immunity” became a scare-phrase?

  3. The US system is an order of magnitude more complex, so there’s obviously more scope for both making innocent errors and finding sneaky loopholes. Therefore I’d expect any new calculation of the tax gap to find a lower figure.

    (Out of interest, how much of our tax gap is uncollected duty on illegally imported cigarettes? Must be significant, given that nobody I know who smokes buys their cigarettes in the UK.)

  4. In the US, almost everyone fills out their own tax return, in contrast to Britain’s PAYE system that taxes salaries before money is transferred to bank accounts.

    This is wrong. The US has had withholding taxes (called pay-as-you-go) since 1942*. US workers are quite used to their employers deducting tax from their paychecks on behalf of state and federal government.

    *One of the designers of the US system was Milton Friedman, back when he was a Keynesian on tax. He later regretted the move.

  5. @Andrew M: does that mean that the way to increase the tax take on fags is to reduce the tax rate?

    A wee Laffer possibility? Would it work for grog too?

  6. There is a difference, but it’s not what Murphy thinks.

    In the US, although there is deduction at source by employers, most people still file a federal income tax return (I believe the deduction system is quite crude and usually takes too much because it doesn’t allow for deductions, so for most people filing a return is a way of reclaimed money).

    In the UK HMRC don’t like dealing with people, so made the PAYE system much more complex and designed to usually collect the right amount of tax, so only a minority (I think I read that it’s less than 10%) actually submit a tax return.

  7. “algorithm” just means “method”, as in, the algorithm for doing addition starts with: for each column of digits on real or imagined fingers, starting with the first number count off the second number of extra fingers, write down the units digit, if over 9 write down the tens digit in the next column to the left, move one column to the left and repeat until you run out of columns.

    Ban algorithms and you ban people doing sums.

    Which may be what they want.

    20% VAT on £2, that’ll be an extra 80p please. No, you’re banned from initiating any thoughts on that, we’ve banned sums.

  8. Another difference between the UK and US systems is that, while both deduct income taxes at-source, in the US system, the amount to be deducted is decided by the taxpayer, who files a W4 with the employer, telling him how much to deduct. The difference between taxes paid and taxes owed is resolved at the end of the (tax) year, with the completion and filing of a tax return.

    Contrary to the assertion by RichardT, the US deduction system is not ‘crude’ at all, and if you want, you can peg your withholdings to exactly match your taxes. It’s just that many people use the system in their own ways. Some over-withhold, in order to get a big ‘refund’ at the end of the year. A strange way to ‘save’, but it’s their money. Some underwithhold, to have more cash during the year and then settle up at year-end. There’s no penalty for doing this unless it’s really egregious.



  9. I’d say algorithm and model now mean, ‘We have examined the entrails of the sacrifice and what is is known. We don’t need any damned experiments.’

  10. dearieme,

    Hard to say where we are on the tobacco duty Laffer curve. We’ll actually get a better measure after this year. There has been a lot less illegal / grey market tobacco over the past six months, since you can no longer ask your Bulgarian colleague to pick up a box of 200 next time he flies home on Wizz air. This in turn should mean a lot more legal tobacco was sold. We’ll know how much more when the exchequer publishes the figures.

  11. Spud is in a bit of a bind, though. As with all lefties he hates the US, but he loves the fact that the US implements the only version of Taxation by Residence AND Citizenship. If a US Citizen or Green Card holder wants to completely get rid of their US tax obligations as well as paying what they are due they also have to renounce their citizenship / Green Card and cough up what amounts to an exit tax.

    I’m sure Spud would be salivating over the ability of forcing this sort of regime on the UK.

    I seem to recall there was a historical study of US taxation that showed even when tax rates where historically high and historically low, on average the amount of tax actually collected never varied far from 19% of US GDP.

    The complexity of US tax law is mostly about pork barrel politics and crony capitalism, whereas in the UK the complexity of the tax law is mostly about trying to give your own client base a break and getting your opponents to pay for it. Not much of a difference, perhaps, but still a difference.

  12. llamas, interesting, thank you. I had only come across those who had withholding at the headline tax rates and then reclaimed for the reliefs at the year end; I did not realise that was voluntary. Must be mad.

    But it still means that Yanks have a closer relationship to the tax system than the largely passive Brits.

  13. Canadian system similar to US, I’ve used the standard withholding rate and had a small refund every year as you claim professional fees etc at that time. Saves the hassle of calculating a withholding amount to take into account deductions and the small amount usually covers the filing fees and weekend camping trip.
    For stuff like sons university fees it’s easier to claim it at end of tax year and just put the money back into his university account for the next year rather than mess around with withholding as well

  14. Tax rates are set such that they bring in a certain amount of money, with ‘uncollected’ taxes being part of that equation. The government therefore collects precisely as much tax as it wishes; but not necessarily from the people it wishes.

  15. @Andrew M
    Bulgarians flying in with a carton of 200 hundred isn’t they way tobacco smuggling’s done. It’s bulk via the shipping routes. That’s probably been easier because coronapanic’s meant that customs checks have been less rigorous. What might have put a crimp in the trade is at the retail end. Lockdown & then the pubs & workplaces being closed have made it more difficult to get in touch with the “fag-man”.

  16. OT but relating to a previous thread. I just got another e-mail relating to free-stuff for reviews on Amazon. Do I take them up on it or not?

  17. “What’s the revenue from selling it on e-Bay etc?”

    Ah, that’s the snag, Tim. I’m in Spain. Spanish don’t really do EBay. What is on there is mostly businesses selling. And a lot of them are UK businesses. For private selling it’d be the Milanuncios classified site or there’s some ghastly phone app I refuse to remember the name of.
    Spanish don’t seem to get e-commerce. But they don’t seem to get the internet either. Apart from spending half their lives on Whatsap. Have you ever looked at a Spanish website? Even I can produce better. Usually they’re full of broken links. Like I’ve said before, incompetence is a national passtime.

  18. Given that a large chunk of the UK tax gap is VAT, I’d be rather surprised if the US methods worked very well at all 😉

    If you look at the analyses, it’s fairly clear that the the gap varies by tax. VAT suffers from criminal attacks, as do excise duties; self-assessment has a lot of evasion (undeclared income) and avoidance (planning), corporation tax has differences of opinion, and so on. Not that HMRC say as much, but what they don’t say speaks volumes.

  19. llamas. So US system not unlike payments by self-employed in UK. Pay estimate by installments and settle up difference on tax return.

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