In Defence of Liberty

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Statistics and Lampposts V: A Misleading Plot

Anecdotes are usually clouding, whilst statistics are meant to be illuminating. However, statistics – and the way they are presented – can be strikingly misleading. In light of Channel 4’s Benefits Street, people tried to highlight the size of the tax gap, compared to benefit fraud and overpayments.

Is the tax gap really £120bn? (Photo: Cerian Jenkins; source unknown)

Is the tax gap really £120bn? (Photo: Cerian Jenkins; source unknown)

Firstly, ‘tax avoided, evaded and uncollected’ – that is, the tax gap – is actually estimated twice. There is the Tax Justice estimate of £120bn, which dwarfs even the £30bn HMRC estimate. Given the graph is meant to comparing the relative sizes; it is very deceptive to provide two distinct estimates for the same amount. The reason behind this disparity should be considered. The HMRC defines the ‘tax gap’ as:

The tax gap is the difference between tax collected and the tax that should be collected and the tax that should be collected (the theoretical liability). The theoretical liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law). The tax gap estimate is net of the Department’s compliance activities.

A Ghost in our Political Machine

In a submission to the House of Commons Treasury Committee, HMRC pointed out that for the corporate tax avoidance, Tax Research UK calculates an “expectation gap”: “the difference between the headline or declared tax rate for companies, and the rate of tax they actually pay”. This means that the use of legitimate tax exemptions, such as offsetting past losses against present profits, is considered avoidance. According to the Tax Journal, David Gauke, the Exchequer Secretary to the Treasury, noted Richard Murphy acknowledged “much” of his £12bn estimate for corporation tax avoidance “may be due to legitimate tax planning”. This is an irreconcilable difference between these two estimates, as they are actually estimates of two distinct ideas. Despite this, the £120bn ‘tax avoidance’ number lingers on: a ghost in our political machine.

Secondly, amalgamating every part of the tax gap, whilst demarcating between benefits error and fraud, is also misleading. The HMRC’s tax gap for 2011-12 is £35bn, and represents 7.0% of total liabilities. In order of size, this gap is comprised of the hidden economy (£5.4bn), evasion (£5.1bn), criminal attacks (£4.7bn), non-payment (£4.4bn), legal interpretation (£4.3bn), failure to take reasonable care (£4.3bn), avoidance (£4.0bn) and error (£2.9bn).

Thirdly, the graph asks “Which one would you focus on?” The amount’s size does not elucidate how easily it can be reduced. For example, the largest component of the tax gap is the ‘hidden economy’, which is created by people paying each other in cash, and then the recipient not acknowledging that income for tax purposes. Since this tax gap is created by many people, it is incredibly difficult to substantially reduce. Cutting non-payment would be nearly impossible, since non-payment arises from taxes owed by defunct businesses and bankrupt individuals.

Tax simplification would be one method to purge the tax gap, but that doesn’t mean benefit fraud should be ignored.

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One comment on “Statistics and Lampposts V: A Misleading Plot

  1. Pingback: A Hopeless Agenda | In Defence of Liberty

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This entry was posted on January 14, 2014 by in Statistics and tagged , .
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