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Nov 05 2010

Why the other ways don’t work

In my last blog post I calculated how to raise money for various things (getting rid of tuition fees, avoiding any benefit reductions and so forth) using income tax; originally the more ranty bit to be found in this post was included, but it was getting a bit long so I separated analysis and rant.

Since the election there’s been a great deal of discussion of cuts, largely this has been framed in terms of a cut to X being apocalyptic where X is some area supported by its interest group. There has been rather less focus on what should happen in place of such cuts, proposing an alternative area for increased cuts has generally been tried: “waste, foreigners in the form of international development, benefit scroungers, Trident“ are ever popular – each of these contributes about £1bn or so per annum in spending – the gap we’re trying to match is about £80bn per annum. There have been some proposals for increased taxes to be paid by “someone else”, an increase in VAT met with considerable opposition (VAT is the third biggest element of tax – the change would raise about £13bn per annum), as was an attempt to cut child benefit for higher rate tax payers, raising about £2.5billion per annum.

The favoured targets for increased taxes are “the rich” and “tax avoidance”. “The rich” are normally defined as “richer than me and the people I know”, which is a poor definition. Tax avoidance, according to an HMRC report under the last government the size of the tax gap – the sum of avoidance (legal) and tax evasion (illegal) was around £40bn per annum. This is disputed with Tax Research UK giving a figure three times larger at £120bn. It’s difficult to see exactly how they manage such a high estimate – it’s seems to be based around the size of the “shadow economy” – things like illegal working. Regardless of this actually collecting the money involved in the tax gap would appear to be difficult: as announced by Danny Alexander there’s a hope that spending £200million per year will result in a tax recovery of £7bn per year. There’s an implicit assumption in tax avoidance that again it’s “the rich” who are responsible but it seem clear from reading the HMRC document that successfully addressing the tax gap would probably impact quite broadly. For example, buying wine in Calais is a tax avoidance; as is paying the builder, decorator and so forth in cash; as is purchasing items in Hong Kong via ebay. The company I work for has changed the way it pays some of my pension contributions to reduce the tax paid – presumably this would count as a tax avoidance too.

Vodafone is in the news at the moment for a £6bn tax avoidance. The £6bn figure is as calculated by Private Eye and is described by HMRC as “an urban myth”; Vodafone appears to have made provision of £2.2bn to address this issue and ultimately paid £1.25bn. It’s worth pointing out that the £6bn figure, accrued over 10 years is typically compared by protestors with a *yearly* benefit cut of £7bn. This sort of presentation leads me to believe that the proposer is somewhere on the innumerate-dishonest scale and discount whatever else they are saying. Taking the Private Eye “high” estimate this is £600million per year, taking the difference between the amount actually paid and the “low” estimate it amounts to £100million per year. Vodafone appears to have paid around £1bn tax on profit in 2009 amounting to a rate of 25% in that year, so it is not true that they pay “no tax”. It’s also worth noting that Vodafone appear to have the legal upper hand in the situation, given a judgement in the European Court of Justice.

At one time Trident or its replacement were cited as a source of ready cash – again the presented cost of up to £100bn is for the entire lifetime of the system of up to fifty years or so i.e. between £1bn and £2bn a year, regardless of this the decision on Trident has been pushed into the future (i.e. beyond the next election). A more likely figure for the Trident replacement is £20bn, or at most £34bn. I’ve said previously that I consider Trident to be Cold War willy-waving but scrapping it is not a big impact – particularly if there is any sort of replacement.

A useful rule of thumb for all these situations seems to be:

  1. Check that tax gain and spending are being compared on the same time period.
  2. Divide quoted tax gain by at least three since that will get you back to a more generally accepted figure.

The latest wheeze is chasing George Osborne for a £1.6million tax bill. Referring to our list above, (1) is met admirably this bill would be payable once, on the death of his father. Experience suggests the figure of £1.6million is fanciful. David Mitchell puts this so much better than me here in the Observer. It’s not that I am in favour of tax avoidance I just see efforts to address the problem by individual harassment as pointless. What is needed, as Mitchell points out, are changes in the law so that tax avoidance becomes tax evasion and is then illegal. It’s ridiculous to expect people to pay tax that they don’t legally have to – it’s not what the great majority of the population do – why expect companies and the rich to do any different?

I’ve yet to see any figures on the “cut deficit through growth scheme”, a priori I’m dubious since the ability of government to influence growth seems marginal and any scheme would need to stretch out beyond the 10 years that even Labour were planning to cut the deficit in by which time using my state-of-the-art recession prediction algorithm we will have experienced another recession, and another addition to the deficit.

I’m uncomfortable with the idea that we should demand services (no tuition fees, protected benefits) but rather than seeking a way to contribute to paying for these services personally try to push the payment for them onto a small fraction of the population. If you demand more money for X but don’t expect to pay any more for it then frankly I don’t think you’re committed to the idea.

8 comments

  1. billynojob

    The dispassionate eye of the scientist surveys the minefield that is tax and spending. And as usual, provides rather more insight than the majority of commentary on these matters, and may enable us to cross it without blowing our feet off!

  2. SomeBeans

    @billygottajob I'm not sure it helps us much! The problem is that "obviously" raising taxes has become electorally unacceptable, and I think also the original motivations for the benefits side of the welfare state need renewing/restating. The reason large cuts in benefits are politically achievable is that they have more support than the tax raising alternative.

  3. lisa ansell

    I think you miss several factors to be addressed. First of all, it is not necessarily a 'choice'. Many of the criticism of the cuts come for very different reasons.
    First of all there is the lack of measurement of the cost of the cut. For instance the housing benefit cut, is likely to massively increase the emergency housing bill, and increase pressure on different public sector budgets. When you make the rules on ESA this stringent, what tends to happen, as well as a lot of hardship- is that each of the very frequent appeals costs a great deal of money. Money which goes to the private companies who implement the rules.

    Ultimately- the factors that are missing from your analysis are social. THere is a difference between want and need, but if you take away something that someone needs- it has effects elsewhere.

    If you claw back this much money from the poorest, if you are cutting at something people 'need'- the money comes from elsewhere. In a different way.

    Every time these policies are attempting- the welfare bill increases.

    Then there is the question of what happens when you take this level of money out of the economy. You can't assess savings and cuts as easily as you suggest.

    Economies are not bank accounts- with a fixed number. They are the movement of money. To take this much money out of the economy, has consequences. Consequences which have to be considered, and which also could cost a great deal of money.

    I have a problem with the bulk of the cuts cocming from the very poorest people- not just morally- although the disgusting rhetoric around it is disgusting. But because the calculations of what is saved when this is done, are ridiculously facile. Any understanding of social policy,and how policies interconnect is absence from this.

    NOt only that= but the cost to the people involved is not just about a loss of income, it is about being pushed away from where you work, and your choices and those of your children being shut down. Not just a cut in income, but a kicking away of the ladders which allow people to improve their situations.

    Being pushed away from the area you live in, out of decent quality housing, having childcare pushed out of reach, away from your support networks is not going to happen because your income is slashed by £1800 a year and you are in the 40% tax bracket. It is also not likely to end up costing the state as much at that income level.

  4. SomeBeans

    @LisaAnsell as a I read it you are making two arguments:
    (1) Most cuts will be ineffective because they are investments that actually pay back more than they cost;
    (2) The costs of cuts go beyond the economic cost.

    I'm happy to accept (2), it's quite clear that for anyone on anything other than the most modest income the amount of money you need to remove from them to cause equal "pain" as a reduction in 10% on benefits is enormous.

    (1) I don't agree with, in the past and around the world governments have spent less than we are currently spending in a range of areas – and the world doesn't end. Many companies, small businesses, and self-employed people have had to reduce spending over the recession, and this time around I think they've done a better job of doing it than they have in the past.

    I don't see this post as in favour of cuts, quite the opposite, what I'm arguing is that there is no point bemoaning cuts whilst proffering no alternate plan. I would be happy with the personal cost of protecting benefits at current level and removing tuition fees but if you put that to a vote you'll find I'm in a small minority.

  5. lisa ansell

    That isn't what I said. Social policy is interconnected, and when calculating the saving to be made by a cut- we have a clear evidence base for what happens. The cost to ESA of forcing such a high percentage of applicants through tests, which are about satisfying a perception in the public that ESA is claimed by scroungers – is huge.

    It is ultimately a policy based on a fiction, and policies based on fiction tend not work, whether in social policy, economics, or science.

    When 40% of appeals are successful, and each of those appeals is carried out at great expense to the taxpayer- that is quanitiable. THe effect on public services of increased homelessness is something that is clearly documented, as is the cost of meeting statutory responsibilities to rehouse. The effect on health bills, social care bills, benefit bills- a matter of evidence.

    TO take away what people NEED- does not make that need dissapear- and does not change the inevitable pressure on other public sector budgets. The effects of poverty, and the costs of the effect of poverty are not fictions.

    To assess savings made in terms of the immediate cost savings makes no sense. If you save £100 per month on housing benefit by cutting, but the effect is that the person who was claiming it has to give up their job and move away- the effect on the taxpayers purse increases. Not decreases. It increases with the cost of homelessness acccomodation if appropriate- instead of £200 housing benefit paid to a working person- you are paying full unemployment benefits and full housing benefit in another area.

    I am saying that cuts in social policy should be guided by a debate about the difference between want and need, and the savings should be made using calculations which recognise the cost to other budgets, made by a saving in one.

    As for your blithe statement that the world doesn't end, I would like you to get a calculator out and add up the average rent, with the average childcare bill- and check out some facts about how many single parents claim housing benefit in order to work. And do a bit of research into what happens when the link between working and paying your bills is removed- what the effects of poverty are on childrens outcomes. And the cost of dealing with these things/

    You may not think 'cuts' are the end of the world. But for the people who a 'cut' is not a loss income, but a removal of the things which allow you to remove yourself from poverty- the need for cut policies to be guided by evidence and not emotional rhetoric, and facile calculations of savings.

    For the children dealt with by Childrens Services who are losing 40% of their budgets- these cuts mean a great deal more than a loss in income.

  6. SomeBeans

    @LisaAnsell I'm not sure you're reading what I'm writing. You have focussed pretty entirely on benefit cuts and I've said I'm personally happy that I should pay more tax in order that there should be at least lower levels of cuts to benefit. You have offered no alternative plan – other than "no cuts".

  7. Lee Griffin

    good post here, a lot of sense. However i can't help but feel a point here, as in most circles on both sides, is being missed. At the end you say about people not being willing to say for things they want or want improved. I find this they short sighted. As a graduate i pay a fair amount of tax, a decent amount of which is due to being a graduate. The idea of my taxes going to all education, and thus me paying for it, isn't something that irks me.

    That businesses and other relatively high earners (compared to the national average at least) that aren't graduates, and indeed the general population that benefit from an educated and socially mobile society, are now paying less while just graduates pay more… That's the thing that irks.

  8. SomeBeans

    Largely I agree with you on tuition fees:

    http://somebeans.blogspot.com/2010/12/tuition-fees.html

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