The only remotely memorable moment from this year's Davos was when Dutch historian Rutger Bregman did this (click here to watch the video):
Bregman told the conference:
I hear people talking the language of participation, and justice, and equality and transparency, but almost no one raises the real issue, of tax avoidance, right? And of the rich just not paying their fair share. I mean, it feels like I'm at a firefighters' conference and no one's allowed to speak about water....
This is not rocket science. We can talk for a very long time about all these stupid philanthropy schemes, we can invite Bono once more but come on, we've got to be talking about taxes! Taxes, taxes, taxes. All the rest is bullshit, in my opinion.
Bregman is, of course, absolutely right. Less time should be spent lauding the rich for their various"philanthropic" projects, and more on scrutinising their tax-dodging -- both on an individual level and a corporate one.
But he may not be correct in focusing only on tax avoidance, nor just on the ultra-wealthy. A new report suggests the scale of tax avoidance in Europe is dwarfed by that of tax evasion. And that's happening not just among the rich (although it is definitely happening among them -- see, for example, the record fine on UBS for facilitating it), but right across the income spectrum, in what's known as the "shadow economy".
First of all, it's important to get the definitions right -- tax avoidance and tax evasion are often used interchangeably, but they are quite distinct and must therefore be tackled using quite different methods.
Tax avoidance is a decision by a taxpayer to minimise his or her tax burden by taking a course of action that goes against the spirit of what legislators had intended (which can obviously be subject to different interpretations). It can be both lawful and unlawful (in that it doesn't conform to recognised laws) but it's never illegal (ie, expressly forbidden by laws).
Tax evasion, on the other hand, is the deliberate, illegal non-disclosure of earnings. The motivation for that might of course be something other than tax evasion -- a drug-dealer might be more concerned about being locked up than having to hand over some of his/her earnings to the government -- but that doesn't matter: if you don't record the activity, you can't pay tax on it and that's therefore tax evasion. It also includes the claiming of allowances, expenses and other tax reliefs to which the taxpayer is not entitled to in law.
According to tax campaigner Richard Murphy's new report, the annual "tax gap" in Europe caused by this illegal tax evasion is between €750bn and €900bn ($850bn-$1tn). That compares with estimates of between €50bn and €190bn a year for corporate tax avoidance, according to previous European Parliament estimates cited by Murphy.
The report was commissioned by the centre-left Socialists and Democrats Group in the European Parliament (which includes MEPs from Britain's Labour party and France's Socialist party), and only looks at the tax gap in Europe. But Murphy says the same trend can be seen all over the world -- the larger the shadow economy, the larger the gap is likely to be.
Murphy told us:
If you look at the whole tax gap, which is the total of tax unpaid which a government thinks should be paid, it’s obvious that tax evasion is by far the biggest problem.
That's quite shocking for people. I think even the Socialists and Democrat Group were quite shocked, in a way, by the outcome. They found it hard to believe that it’s actually evasion that’s the biggest issue. And yet it is, because it’s so commonplace. It’s paying your cleaner in cash. It adds up when you think that you also paid your builder in cash, and your child’s tutor.
It's not just the cleaners, the builders, the tutors and the drug-dealers who are involved. A study published in October by Berkeley professor Gabriel Zucman, along with Annette Alstadsæter and Niels Johannesen, found that the top 0.01 per cent of households in Scandinavia evaded about 25 per cent of their tax, compared with an average of 2.8 per cent for the rest of the population:
But neither is it just the wealthy who are the problem. Romania's shadow sector, for example, makes up around 29 per cent of the economy, based on the "Multiple Indicators Multiple Causes" (MIMIC) method used by Leandro Medina and Friedrich Schneider in their work for the IMF, which uses the consumption-to-income gap to calculate how much income is not being accounted for (by looking at, for example, electricity use and the amount of bread consumed in an economy). Even Britain's shadow economy, among the lowest in Europe, stands at around 10 per cent.
Here's Murphy, again:
I know there are tax justice campaigners who aren’t in the slightest bit comfortable with what I’m saying... But the figures for evasion are just too big to be attributable to the wealthy. They are split across the population as a whole.
Murphy doesn't provide numbers for individual tax avoidance by the ultra-wealthy, via offshore tax havens and other tax avoidance schemes, but he says those figures would be likely to be dwarfed by both those for tax evasion and avoidance at the corporate level.
Why, then, are we so fixated on all the Davos-attending philanthrobillionaires and not on Europe's huge shadow economy?
It's partly because it feels like if only a handful of individuals (or maybe, a World Economic Forum's worth) behaved differently, that could make a big difference. It's also because it bothers us that the rich are able to get away with it and that we're not. Murphy uses the example of Britain's MP expenses scandal from ten years ago as an analogy -- though the amounts of money involved were immaterial, the feeling was that if politicians were fiddling around, then why shouldn't everyone else.
Unlike the MPs' expenses scandals, however, the amounts of money that we're talking about among the tax-dodging elite are material and do in fact matter in the overall scheme of things. And by endorsing the kinds of philanthropic donations that allow them to boost their reputations, we're in effect allowing the ultra-wealthy to make decisions on how to spend money that would normally be in the hands of a democratically elected government.
But there’s also surely a kind of tolerance mentality among some of us towards parts of the shadow economy: if the people at the lower end of the income spectrum, such as cleaners, were to pay all their taxes, they wouldn't have enough to live on, goes the thinking.
Murphy, however, argues pretty convincingly that tax evasion actually leads to social inustice and greater inequality:
Tax law should be enforced and all should be required to pay what is owed by them. If that is not done actual inequality arises: those who pay their taxes are worse off than those who do not. Resentment builds amongst taxpayers and non-compliance increases. More worryingly still, honest business is undermined by dishonest business. This means that honest businesses are more likely to fail. As a result economic growth, financial stability, business investment, and employment prospects are all harmed. The cost of tax inequality is high, especially if it becomes endemic.
It's important to note that Murphy's stats aren't universally accepted. HMRC's estimates on the scale of tax evasion in the UK, for example, stand at around £5.3bn, whereas Murphy estimates that at more than £75bn (almost 15 times higher). But he says that's because they are taking entirely different approaches: while he takes a top-down approach, starting with GDP, HMRC use a bottom-up approach, making the calculations based on the tax returns that they've been given.
Alex Cobham, chief executive of Tax Justice Network, doesn’t think enough research has been done into the scale of tax evasion to draw any conclusions about whether or not it represents more money lost than tax avoidance -- a lot more work has been done on the latter. He also points out that some of the activity in the shadow economy is likely to be marginal (ie it might not place at all if it were to come out of the shadows).
Still, Cobham told us:
What these numbers say is that the potential scale of evasion is very large. And so even if you were to take 10 per cent of Richard’s numbers, that’s big enough that we should care a lot and do something. This is a big area about which we are probably consistently not doing enough. Part of that is getting more research and getting more confident about the numbers.
So to sum up, governments -- and all of us -- need to think about tax evasion more. There is often a false dichotomy in the way politicians think about how to reduce fiscal deficits: rather than weighing up hiking taxes versus slashing government spending, they also should be considering how to increase their tax bases by bringing them out of the shadow economy.
Possible counter-measures to evasion suggested by Murphy include forcing every company to declare their accounts and making their shareholders and directors personally liable for any missing tax; and asking banks to supply HMRC or the relevant domestic tax-collecting ministry with reports of all the companies they provide banking or accounting services for. These measures alone, reckons Murphy, would see about a third of the missing tax revenues recovered.
The good news, though, is that both tax evasion and corporate tax avoidance are actually already shrinking, according to Murphy:
The measures that are being taken to increase reporting are working. I believe that in 2012 there was a change in attitude. Large companies that until then had basically seen tax avoidance as being a risk-free, reputation-free, activity, suddenly began to to see — because of Google, Amazon and Starbucks sitting in front of Margaret Hodge — that this could land them in deep water...
We’re seeing companies that are actually talking to us and are saying: 'we’ll close down our overseas operations if that gives us a Fair Tax Mark, because this is too important for us now.' It’s a staggering thing to discover. Ten years ago the idea that someone would have said that to us was remote in the extreme. It's unbelievable.
As the famous philanthropist John Rockefeller once noted: “Next to doing the right thing, the most important thing is to let people know you are doing the right thing.”
UBS hit with €4.5bn penalty in French tax evasion ruling - FT
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