It's not just about increasing borrowing -- we need to start closing corporate tax loopholes.
The economic recovery in the 2010s is slower than the recovery from the great depression of the 1930s. A major reason is the government’s failure to invest in the economy. Instead, it prioritised tax cuts for corporations and failed to check leakage of tax revenues.
Were they not blinded by their own economic dogma, the government would see that there are plenty of revenue raising tactics on the table to help rebuild the economy. Here’s a short guide to the many options open to them.
UK ‘tax gap’ — the difference between taxes actually collected but HMRC believes should have been collected -– persists. Tax avoidance, evasion and other leakages are the main components of the tax gap.
The average tax gap for 2010-2017 is close to the latest estimate of £34bn a year. This means that for the seven years since 2010, some £238bn has not been collected. Alternative studies put tax gap at around £120bn a year, meaning £840bn may not have been collected.
Rather than investing in HMRC the government has starved it of resources. The economic case for investment is strong.
Every £1 invested into investigations of large businesses yields revenues of £97, and £18 for every £1 invested to secure compliance from local economy and high net worth individuals.
Around £300bn is stashed away in tax havens by UK citizens though following the Paradise Papers revelations the amounts are likely to be underestimated.
Let us be generous and assume that the individuals concerned had already paid their UK taxes on their accumulated wealth of £300bn, and were trying only to dodge taxes on the return of their investment.
A modest 5% return would yield £15 billion. If taxed at the marginal income tax rate of 45%, this would have provided annual tax revenues of £6.75bn or £47.25bn for seven years of the Tory rule. Since 2011, there has been only one successful prosecution for offshore tax evasion.
Corporations shift around €600bn of profits each year to low/no tax jurisdictions through transfer pricing techniques involving royalty payments, management fees and interest payments on intragroup loans.
The UK loses around €12.7bn (£11.5bn) of tax revenues each year and since 2010 may have lost £80.5bn. The House of Commons Public Accounts Committee has inquired into the tax affairs of Google, Microsoft, Starbucks, Amazon, Shire, Apple and others. None have been followed by test cases.
Tax Cuts for Corporations
Large amounts can be raised by simply reversing the corporate tax reductions. In 2010, the corporation tax rate was 28%. It is currently 19% and set to decline to 17% in 2020.
Based on the data collected by the House of Commons Library and various reports published by HM Treasury, the cumulative effect of the cuts from 2010 to the possible date of next election (2022?) would be nearly £56 billion.
The government provides a variety of tax reliefs to individuals and corporations for social and economic objectives. Some are being abused.
The National Audit office reported that for 2013-14, the cost of entrepreneurs’ relief was £2.9 billion cost three times more than HMRC original forecast. The implication is that artificial schemes may have been designed to secure the tax relief.
The Public Accounts Committee reported that “The costs of R&D tax relief increased from around £100 million in 2001 to over £1 billion in 2011-12 whilst the actual amount of business expenditure on R&D stayed more or less the same.
We have seen examples of large increases in the cost of reliefs as a result of abuse. Spikes in the cost of Share Loss relief, Business Premises Renovation Allowance, and Film Tax Relief were all caused by the systematic use of these reliefs for tax avoidance”.
Currently, contributions to pension schemes attract £50 billion of tax relief. Around 65% of the relief goes to additional and higher rate taxpayers i.e. those paying income tax at marginal rates of 40% and 45%; that is some 4.6 million workers out of a workforce of 30.4 million.
Restricting the tax relief to 20% i.e. equivalent to the basic rate of income tax for everyone would provide £13 billion for investment each year.
The government still does not provide justification for all the tax reliefs. A careful scrutiny can raise billions for investment.
Broaden the Tax Base
Revenues can be raised by broadening the tax base. Stamp duty, which has been levied for 300 years on the purchase of company shares, can be applied to corporate bonds and most derivatives.
This type of financial transaction tax in the range of 0.2% to 0.5% could raise £4.7bn each year and would increase in line with financial trade.
Another possibility is to subject foreign buyers of UK residential property to additional taxes. An additional 15% stamp duty on the purchase of residential property by offshore companies can raise up to £3.5bn
The above list in not exhaustive and I have not even touched the subsidies given to oil, gas, railway and other companies. The government can find revenues for investment, if it so wishes. It is only constrained by its ideology. Austerity policies are deliberate government choices to weaken and discipline the working class and have no economic basis.
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