By David Walker | 1 January 2012
When the financial crisis began, governments focused on cutting spending to reduce their debts. Now attention is turning to the other side of the coin – raising revenue. Tax collection is the new mantra
As the global economic crisis has played out, a previously obscure public official has shuffled diffidently to the front of the political stage – not just in Greece, Italy and Spain but also here and in the US. Indeed, this is happening wherever governments are pressed for money, which is pretty much everywhere.
That official is the tax officer. Like moles blinking in unaccustomed sunlight, those who assess and collect state revenues are suddenly the people of the moment, and their moment might last as long as it takes to restore financial order.
On taking office, the new ‘technocratic’ governments in Italy and Greece immediately promised to strengthen and renew their tax offices, even before they turned their attention to spending. At the centre of the European Commission’s draft budget for 2012 is a proposal for strenuous action to improve VAT collection.
Margaret Hodge, chair of the Commons Public Accounts Committee, says: ‘Traditionally, the political and policy action has been in public expenditure, whether you wanted more or less. But now we’re all much more concerned with the efficiency and effectiveness with which the revenue is collected – or not.’
An event a few weeks ago at Westminster captured some of what has been happening as governments struggle to maximise their income. The conduct and professionalism of the tax collectors came under intense scrutiny. In a coup de théâtre, Hodge abruptly halted PAC proceedings and demanded that Anthony Inglese, the senior Revenue & Customs official appearing before the committee, swear an oath – opening him to the threat of perjury if his answers were found to be false. So rare was the proceeding that the committee clerk had to wander the corridors to find a Bible.
This case involved a controversial settlement of liabilities with the department by Goldman Sachs, and the PAC convened multiple hearings to get to the bottom of it. The MPs were striving to prove wrong the contention in the 2010 Mirrlees review of the UK tax system that ‘the legislature has a rather weak oversight role’. The parliamentarians won their point. Eventually, Sir Gus O’Donnell, the head of the civil service, had to appear himself and concede major changes in the R&C’s governance.
Successive inquiries by the Commons’ Treasury select committee, as well as the PAC, demonstrate the extent of MPs’ new-found interest. It is as if they are saying, whatever might happen to spending, it’s time to worry about the other side, where the revenues and income are coming from.
At one level, even Right-of-centre politicians are ready to contemplate new taxes. German Chancellor Angela Merkel has joined French President Nicolas Sarkozy in pushing for a micro tax on financial transactions, a proposition originally advanced both by the Nobel Prize-winning economist James Tobin (though he has backtracked since) and the distinctly Leftish international lobbying group Attac.
According to the study Taxation trends in the EU, published by Eurostat, new taxes have to be considered, for example on property. This was also advocated by the Mirrlees inquiry, conducted for the Institute for Fiscal Studies. ‘Little has been done to increase housing taxes even though research shows they are among the most growth friendly.’
At another level, this new attention to tax collection is bland fiscal logic. If the ends don’t meet, you have to look at both sides of the balance sheet. Some deny there is a spending problem at all. Richard Murphy, the accountant and tax activist, says: ‘Look at Italy, it’s neither bust nor overspending. It could pay for services, but chose not to do so through taxes. It’s “bust” because of the size of the shadow economy, 27% of gross domestic product, meaning it loses about e175bn in tax.’
Murphy’s new book, The courageous state, calls for a great programme of recruitment to revenue regimes, to tackle tax evasion. He wants ‘to put a general anti-avoidance principle into operation in law, and ensure that tax is seen to be collected in all the major communities of the UK by ensuring that a very visible presence of HMRC is to be found in each and every one of them’.
Needless to say, tax is not going to cease being a – the – bone of political contention and a prime source of party difference. It will be the unavoidable theme of the 2012 US presidential contest. Economists differ on the effects of taxes – this is probably where that discipline comes closest to losing its veneer of intellectual disinterestedness. We know that within the eurozone the lower tax countries, notably Spain, Portugal and Greece, hit the buffers first. Arguments rage about the level of income tax at which revenues decline because they act as a disincentive to enterprise and so, paradoxically, reduce the total tax take. But look at the adjacent table. It shows that within the EU, it is hard to make hard and fast connections between growth, solvency and the top tax rates.
What is certain is that whatever level tax is set at, most governments are now mobilising to maximise the income due them. The size of the task ahead is shown by the EU estimates for the shadow or black economy: Germany’s is not much smaller than the GDP of Greece and Portugal combined. In 2010, Estonia’s shadow economy was equivalent to e3 out of every e10 spent in the country. It was the eurozone’s largest, followed by Greece, at e2.5 of every e10 in the official economy. If Greek employment and consumption within this black area had been taxed, it’s safe to say the state’s fiscal balance would be looking a lot healthier.
In addition, there’s tax that has been levied but not paid. According to the European Commission, at the end of 2009, 20% of the tax owed for that year was outstanding, a sum that would have put a substantial dent in state debts.
In the UK, after years denying that the ‘tax gap’ could be calculated, Revenue & Customs recently announced it had narrowed to £35bn, still a large enough sum to bite a large chunk out of the budget deficit. Perhaps the exact amount is less important than the fact that ‘there is clearly money out there that should be coming into the Exchequer and is not,’ as Graham Black, president of the Association of Revenue & Customs senior managers union, told MPs.
No wonder then that European finance ministers and the European Commission are insisting that bail-out countries tighten their tax regimes and even, in the midst of swingeing cuts in public sector employment, take on more revenue officials. The Greek government’s deal with the commission, European Central Bank and the International Monetary Fund included measures on evasion and avoidance, new arrangements for tax audit (bringing audit in house) and quicker tribunals for appeals. The Memorandum of Understanding signed by the Portuguese government promised to merge tax and customs and revamp its IT, increase audit staffing by a third by the end of 2012 and review audit performance by the end of December 2011.
But revenue systems are also bureaucracies, in the line of fire for finance ministries seeking spending cuts. In the Netherlands, Peter Veld, director general of tax and customs, acknowledges a struggle to ‘get the house in order’ and make tax collection more efficient and effective while budgets are being cut.
Yet campaigners have long pointed out the anomaly that the net administrative cost of detecting fraud by benefits claimants is a tiny fraction of the potential gains from staffing up Revenue & Customs to target unpaid tax.
Of course, the picture varies according to how fraught the politics of tax is. In the US, the centenary of the constitutional amendment that made federal income tax possible is coming up in 2012 and tension remains between revenue raising and citizen rights.
Donald Shulman, the US commissioner of internal revenue, says diplomatically that his goal is improving service (to make voluntary compliance easier) while at the same time enforcing the law to make sure everyone pays what they owe. The estimated net US tax gap was $290bn in 2005, enough to make a sizeable dent in the federal deficit.
Attilio Befera, general commissioner of the Italian Revenue Agency (Agenzia Delle Entrate) has talked of a ‘balanced approach’– meaning ‘zero tolerance for aggressive tax planning, but at the same time impartiality and fairness in evaluating legitimate tax planning’. It’s hard to see such a nuanced approach surviving the desperate efforts the Italian government will have to take to stave off bankruptcy.
The scene is set, in some countries, for a stand-off with the wealthy. Even the normally pro-business Organisation for Economic Co-operation & Development concedes that, for tax authorities, ‘focusing resources on high net worth individuals can achieve significant improvements in compliance’.
Financial crises haven’t stopped tax regimes from having to confront a long list of threats to the revenue base. Near the top is organised crime – and technology. In 2010, the US IRS repelled more than 35 million unauthorised attempts to access its computers – some by criminals, some perhaps by aggrieved taxpayers. Revenue & Customs admits to £6bn annual losses through criminal attacks, plus £4bn from evasion.
Richard Boucher, deputy secretary general of the OECD, is worried that criminals are using telecommunications and trade liberation ‘to carry out illicit activities with greater speed and on a wider stage’.
He adds: ‘They can also more readily hide their traces by using multiple jurisdictions and by recycling the proceeds of their crimes at dizzying speeds. So we need to operate across borders and between agencies as well.’
The pace of collaboration has had to accelerate – the number of individual Americans paying taxes in a country other than the US increased by almost a third during the boom years 2003 to 2005. So the modern tax official will have to be prepared to do some flying.
New and innovative forms of evasion are ‘constantly under development’ said a recent EU report, necessitating more co-operation between states. As the bank crash and recession unfolded, campaigners identified tax havens as culprits. At the Group of 20 summit in April 2009, finance ministers and central bank governors pledged concerted international action against tax havens. Cynics correlate the recent spurt of spending by the Isle of Man government on London consultants and lobbyists with the threat to that peculiar island’s tax regime.
Nicholas Shaxson’s book, Treasure islands, singles out the toleration extended by successive UK governments to the Channel Islands and Gibraltar in particular, despite their direct and indirect costs to UK taxpayers.
In a recent report, the charity ActionAid said many of the UK’s top companies were actively using tax havens to shield their earnings. Campaigners have shed light on territory formerly swathed in secrecy. The treaty recently concluded between the UK and Switzerland, preserving anonymity for tax avoiders banking in that country as long as they paid notional tax, has been strongly criticised and might be challenged under EU law.
The Swiss, it is said, concluded the treaty and a similar one with Germany only after whistle blowers started leaking details of tax evaders’ accounts. In Germany, courts had to rule on whether the government could purchase stolen disks with Swiss bank data – giving the business of tax collection a glamorous, clandestine sheen.
So will tax officials become ‘culture heroes’, as they did in the US in the 1920s and 1930s in the fight with organised crime? However efficient they are, in most European countries tax collectors are not going to produce revenue fast enough to service, let alone pay down, debt while maintaining public services at politically acceptable levels. The stage remains set for bruising battles about what taxes and how high, separate questions from how well they are gathered in.
‘I’m not sure it’s a “golden age” for tax officials,’ says Tina Riches, technical director at the Chartered Institute of Taxation, which represents professional tax advisers. ‘But the public have become more and more aware of tax, and I am sure it won’t fall out of the headlines any time soon.’
It was in the eighteenth century, as the state started to take its
modern shape, that writers coined the adage that only two things are
certain: death and taxes. In the twenty-first century, as states fight
to match spending and revenues, mortality rates are falling but the
reach and certainty of taxes is going to have to grow.
David Walker is a writer and commentator on public policy and management’
This feature first appeared in the January edition of Public Finance