In every Budget, whichever party is in charge, there is a bit about reducing the extent of tax avoidance and evasion. Clamping down on tax dodging always sounds like a big free lunch. Politicians find the prospect particularly appetising when they are having to make tough decisions in other areas, balancing spending people want with taxes they hate.
It is never quite as easy as it sounds though. Crackdowns too often drive people to avoid taxes in different ways (and the avoidance strategy of last resort is always leaving the country) rather than making a lasting difference. Building a simpler tax system with fewer loopholes is a more credible solution but the current Government’s efforts show the huge political challenges making that happen on a revenue neutral, or revenue raising, basis. We really need tax cuts and tax reform, as the 2020 Tax Commission set out. But, in the meantime, there is a simple way for politicians to limit tax avoidance and evasion: stop doing things that make the problem worse.
There have been plenty of examples of that happening in the past. For example, I wrote in Let Them Eat Carbon about how the European Union Emissions Trading Scheme enabled carousel fraud, allowing criminals to make a fortune out of Value Added Tax. That mistake has been made now. But there are other areas where the Government can still avoid new regulations that might increase tax avoidance and evasion.
To give one important example, there is good evidence that tax evasion is less likely when people are using credit and debit cards than it is when they use cash. In an industry study, Friedrich Schneider – a well respected expert on the shadow economy – finds a strong correlation between the extent of electronic payments and the size of the shadow economy as a share of the overall economy.
If we want to limit tax evasion, it would be really bad news if fewer people used cards, and more of them paid cash. Unfortunately, as the Don’t Discard campaign from MasterCard points out, that could be the effect of the European Union interfering with our payment system. Despite the fact that the European Commission’s own research finds that interchange fees in Britain – at least for credit/charge cards – have “tended to decrease”, they are proposing to regulate the rate. Interchange fees are effectively the charge a retailer pays when a customer uses a card. The Don’t Discard website points to Australia’s experience as a warning about what that could mean:
In 2002 the Reserve Bank of Australia reduced interchange fees by some 50%, saving retailers AU$850 million a year. Unfortunately, this has meant consumers are paying some AU$500 million more in additional card use fees to cover the shortfall while the benefits have declined. This has translated into 22% more in annual fees for standard credit cards and 77% more for reward cards.
Not only would that be an unwelcome new charge for consumers. It would also almost certainly reduce the extent of electronic payments. Particularly for those marginal customers who are already most likely to pay with cash, and where transactions are most likely to fall through the net. It is hard to see how more regulation in this area is right for Britain where the market is working relatively well. And it could mean more tax evasion and more of a hole in the public finances for the Government to try and fill.
Another example is plain packaging for cigarettes, which could also make it easier for people to evade taxes (often without even knowing it).
HM Treasury has plenty on its plate already. But if politicians and officials there really want to ensure that Britain’s tax base doesn’t slip through their fingers, they can’t just think about their own policies. They also have to keep an eye on what other Departments are doing and what the European Union is up to. If they don’t do that, and make sure they ask serious questions about this kind of new regulation, they will squander all of the hard work and political capital that goes into the Budget each year.