Written evidence submitted by the Child
Poverty Action Group
1. INTRODUCTION
1.1 "Taxes are what we pay for a civilised
society"
1904—Oliver Wendell Holmes Jr, American associate
justice, Supreme Court, Compañia de Tobacos v. Collector
1.2 CPAG welcomes the Committee's inquiry into
the principles of taxation. We recognise that different approaches
to taxation can have very different economic and social impacts.
This means that decisions on taxation are not simply about the
most bureaucratically efficient way of collecting revenue.
1.3 Taxation policy can reduce, or worsen economic
inequality and poverty. It must be an explicit and transparent
policy objective of government to ensure the system of taxation
has a progressive impact reducing economic inequality and poverty.
1.4 Taxation policy must also be firmly guided
by principles that accord with the national aim for the good society,
supporting aspirations and policy goals in areas like social justice,
social cohesion, public health and environmental protection.
2. PRINCIPLES
FOR TAXATION
2.1 The most fundamental principle of taxation
must be fairness. In the last three decades we have seen
moves away from direct and progressive forms of taxation, such
as income tax, to indirect and less progressive, or even regressive,
forms of taxation such as VAT. This has taken place at the same
time as rising economic inequality, partly driven by the fact
that the poorest income decile now pays a higher proportion of
their income in tax than the richest decile.
2.2 Much attention must be paid to the proportion
of income paid by different income towards specific taxes, and
towards a household's total tax liabilities. Fair taxation
means that the total combined burden of taxation as a proportion
of income must increase up the income distribution.
2.3 A second key principle must be that tax
policy should always be looked at in the round as part of fiscal
policy; and in particular that the vital role which taxation
plays in tandem with universal benefits must be understood and
applied. For example, in the case of a payment like Child Benefit,
it is readily acknowledged that it is sometimes received by people
who are not in a situation of great financial need. But the higher
amounts paid in tax by those households mean that the overall
fiscal policy ensures need is targeted without wealthier households
receiving an unnecessary net boost to their income. This allows
the full benefits of universalism to be realised, such as high
take up, horizontal redistribution (recognising all children equally),
cheap administration and providing a life raft in times of change
like redundancy or the need to flee an abusive partner. It is
highly inefficient to have means testing flourishing in both the
benefits system and the tax system. Greater use should be made
of means testing in the tax system where efficient structures
are already in place. The encroachment of means testing into the
benefits system in tandem with a move away from progressive taxation
has helped reduce benefit take-up and raised overall administrative
costs across benefits and taxation.
2.4 We strongly support the principle of recognition
of children and basic need in the tax system. For example,
VAT exclusions apply to food and children's clothing. Child Benefit
previously existed as a tax allowance and the equivalent support
for children is still applied in the form of a tax allowance in
many EU countries. We believe this kind of principle should continue
to be applied as extensively as possible.
3. COLLECTION
OF TAXES
3.1 The rate of revenue collection is appalling.
The official estimate of the tax gap is at least £40 billioni,
but other estimates put it as high as £175 billionii.
This means that a very significant proportion of the deficit,
perhaps the great majority of the deficit, could be attributed
to failure to collect revenue that is due.
3.2 Tax fraud alone accounts for at least £15
billion; compared with annual benefit fraud of £1.1 billion,
this is a much greater loss to the tax payer.iii It
is therefore concerning that the strategic objectives published
by government departments for the current parliament seem to indicate
a lower level of interest and softer touch at the Treasury on
tax fraud than is shown toward benefit fraud by the Department
for Work and Pensions. High profile public information and advertising
campaigns have targeted benefit fraud, but there has been no such
effort to stigmatise and discourage tax avoidance and evasion.
The Government has a duty to make the positive case for taxation
as a social good and a social obligation and should consider a
high profile public information campaign to stigmatise tax avoidance
and evasion.
3.3 Collecting taxes from wealthy individuals
or corporations can present additional challenges because they
are in a position to employ expert advice to help them avoid taxes.
Some argue that because wealthier people have become increasingly
effective at avoiding tax, we should not bother to tax them so
much, but we are in complete disagreement with this view. We
believe there has been a lack of will to focus on the closing
of loopholes, simplification and investment in enforcement that
would ensure a greater level of revenue is collected.
3.4 Some tax payers are able to speak louder
than others in favour of their own interests. There are powerful
lobbies for corporate tax payers and wealthy individuals with
significant sums of money invested in persuading the government
to decrease their tax liabilities. Lobbying can be conducted by
traditional businesses representatives, such as the Confederation
of British Industry, or by front organisations set up by wealthy
elites. Too often avoidance from wealthy elites has become a threat
to government, whilst evasion and avoidance in the cases of tax
rises in other areas may receive too little consideration—for
example the possible increase in black market trading resulting
from rises in VAT. We believe there has been a creeping tendency
for politicians to be too credulous in response to claims and
threats from wealthy elites who seek policies that limit their
tax liability, or who threaten to avoid tax payment.
3.5 Announcements by the Chief Secretary to the
Treasury suggest that the Government's headline objective on tax
avoidance is to reduce it by £7 billion per annum by the
end of the current parliament. Even on the lowest and most conservative
estimate of the tax gap (the HMRC estimate of £40 billion),
this is less than a fifth of the total; and it is just 4% of the
top end estimate of the tax gap. There would be a public outcry
if the Government's target on recovering funds lost to the taxpayer
through benefit fraud and error was limited to just below 20%
recovery at best, or perhaps as low as 4% recovery. This is the
limit of government ambition on the tax gap, despite the fact
that the sums lost to honest taxpayers because of the tax gap
far exceed those for benefit fraud and error.
3.6 It is crucial that HM Revenue and Customs
have adequate human resources to collect tax and conduct investigations.
Employment of additional staff is likely to more than pay for
itself at a very favourable ratio to the outlay. It has been estimated
by Richard Murphy, visiting fellow to the Tax Research Institute
at the University of Nottingham, that each additional officer
could be expected to recover £252,000 of debt owed to the
Exchequer through unpaid revenue.iv
3.7 At a meeting in which Child Poverty Action
Group participated last year at the conference of the Public and
Commercial Services Union, many officers from local tax offices
complained that staff cuts would mean higher levels of tax avoidance.
One tax officer told the meeting that he knew exactly who the
local businesses men are in his area who will no longer pay as
much tax to the Exchequer once the local office, scheduled for
closure, is shut. He suggested they will be laughing all the way
to the bank. It is vital that investment is made in local offices
with staff who build up an ongoing knowledge base of local tax
liabilities and are have the knowledge necessary to quickly recognise
and investigate cases of avoidance in their area.
3.8 We recommend an immediate review of cuts
to HMRC staff involved in revenue collection, enforcement and
investigation and a freeze on closure of local tax offices.
3.9 We further recommend that the Treasury reviews
its objectives in regard to lost revenue and produces a comprehensive
strategy with ambitious targets for maximising the role that closure
of the tax gap can play in reducing the deficit, hence alleviating
the need for public spending cuts that may lead to job loss and
fiscal hindrance.
4. POLICY GOALS
4.1 Reversing the rise in economic inequality
that has affected the UK over the last three decades is an aim
shared by all three main Westminster parties. The Prime Minister,
David Cameron, said while leader of the opposition: "The
Conservative Party recognises, will measure and will act on relative
poverty… Fighting relative poverty [is] a central policy
goal"v.
4.2 A further policy goal of the Government is
the eradication of child poverty by 2020 in accordance with the
Chid Poverty Act 2010. Taxation policy impacts on levels of child
poverty due to (a) its direct impact on family budgets, (b) its
role in redistribution, and (c) its role in providing revenue
for services that alleviate immediate need and improve long term
life chances. Decisions on taxation are therefore levers that
can impact on levels of child poverty in both positive and negative
ways. The Government must ensure that child poverty impacts
are considered so that taxation decisions contribute to the measurable
impacts on child poverty necessary meet the requirements and policy
goals of the Child Poverty Act.
4.3 We recognise that some policy goals that
demand taxation approaches have the potential to conflict with
goals on inequality and poverty, such as the growing need to tax
carbon consumption. Where this is necessary, tax changes must
be made in the round with other policies to address fairness for
low income families. For example, increases over time to the rate
at which domestic fuel has been taxed have not been sufficiently
matched by policies to redress the impact on low income families,
such as tax free fuel allowances for some types of household,
energy efficiency refits for low income households and requirements
on energy companies to introduce policies like social tariffs
with sufficient reach. Greater use must be made of impact assessments
where there is potential for such conflicts. Policies to redress
negative impacts for low income families resulting from taxation
approaches in areas like health and environmental protection must
be timely and of fully commensurate scale to protect families.
5. TAX POLICY
FOR GROWTH
5.1 There are important principles in regard
to when it is right to use taxation rather than other fiscal levers.
Rarely is the application of such principles more important than
in situations like the present when the country faces a major
deficit.
5.2 Different fiscal policies are associated
with different economic multipliers and can have fiscal
stimulus, or fiscal hindrance effects. Powerful voices
from elite groups like corporations and wealthy individuals warn
that if they are taxed any higher, there will be negative economic
consequences. We believe these claims are regularly given too
much credence with too little scrutiny. The success that other
wealthy countries have at operating more redistributive tax systems
than the UK suggests that the claims are overstated. If there
are structural problems such as loopholes and complexity that
are responsible, then it is these which need to be tackled.
5.3 Far too rarely are the economic impacts considered
of those taxation and fiscal policies that are unfavourable to
the lowest income households. A crucial feature of low income
families is that they have the highest marginal consumption rates.
They go out and spend their meagre income immediately in their
local businesses. Comparatively, the wealthiest households have
lower marginal consumption rates and are much more likely to tie
up income in offshore tax avoiding investments, spending on high
capital and luxury goods, or make regular trips overseas during
which they spend in other territories.
5.4 The decision to focus deficit reduction primarily
on spending cuts rather than taxation for wealthy households,
with an annual reduction to benefit payments of £18 billion
by the end of the parliament, should therefore be looked upon
as a massive fiscal hindrance package. It should be expected to
have negative consequences for economic growth. These will be
particularly targeted to the poorest communities, exacerbating
economic decline in areas of concentrated deprivation, high unemployment
and low levels of job vacancies.
5.5 Positive economic multipliers and fiscal
stimulus affects have been subjected to greater academic and empirical
scrutiny than negative multipliers and fiscal hindrance.vi
However, fiscal hindrance is of equal importance generally, and
of greater importance during periods of fiscal contraction in
an economic cycle. Evidence of the strong positive multiplier
effects for targeted income transfers to households with high
marginal consumption rates strongly suggest that, conversely,
cuts to such income transfers will have significant fiscal hindrance
impacts.
5.6 We recommend that the Office for Budgetary
Responsibility be tasked with an independent study into economic
multipliers so that it is able to provide independent and transparent
information to the government and the public on the expected multiplier
effects—and the expected stimulus or hindrance impacts—of
taxation policy decisions and other relevant fiscal policy decisions,
such as income transfers through welfare benefits. This will improve
decision making and increase public confidence in claims made
by government in regard to the economic objectives of such fiscal
policies. In the meantime the Government should publish any economic
multiplier estimates it is already using in its own modelling.
January 2011
REFERENCES
HMRC, Measuring Tax Gaps 2009 (http://www.hmrc.gov.uk/stats/measuring-tax-gaps.pdf)
Richard Murphy FCA, Tax Justice and Jobs: The
business case for investing in staff at HM Revenue and Customs,
2010 (www.pcs.org.uk/taxjusticedoc)
National Fraud Authority, Annual Fraud Indicator,
January 2010 (http://www.attorneygeneral.gov.uk/nfa/GuidetoInformation/Documents/NFA_fraud_indicator.pdf)
Richard Murphy FCA, Tax Justice and Jobs: The
business case for investing in staff at HM Revenue and Customs,
2010 (www.pcs.org.uk/taxjusticedoc)
The Scarman Lecture, 24.12.06
See:
— Effects
of Fiscal Stimulus in Structural Models, IMF Working Paper WP/10/73,
March 2010 (in particular section G, p.
18) (http://www.imf.org/external/pubs/ft/wp/2010/wp1073.pdf)
— D Elmendorf
and J Furman, "If, When and How: A Primer for Fiscal Stimulus",
The Brookings Institution, 2008.
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