Honest victims of tax dodgers

Monday View|Daily Mail13 April 2012

TAX evasion and benefit fraud is costing the British taxpayer about £111bn a year, almost half the annual amount paid in taxes.

A study, in the latest issue of the Economic Journal, estimates that the black economy comprises 10.6% of our gross domestic product.

A 'hidden' economy of that magnitude would have been worth an extra £111bn to the participants in 2002.

This is a similar figure to the £116bn handed over by the government in cash benefits such as state pensions, income support, disability benefits, tax credits and rent rebates. It is nearly half of the £237bn paid in direct taxes.

Put simply, tax evaders and benefit fraudsters are costing honest taxpayers very dear.

If they were identified by more rigorous inspection, the benefit bill could be cut by £111bn without lowering living standards for genuine claimants - and the tax burden on honest citizens could be cut in half.

But the estimate may understate the full extent of the problem. It is based on a detailed analysis of the levels and patterns of income and expenditure recorded in the Family Expenditure Survey conducted by the Office of National Statistics.

That analysis is limited to households with married couples where the main wage earner has a job and whose main source of income is wages or self employment.

So it excludes underreporting of income by single adult households, people over the official retirement age, the unemployed and the unoccupied.

Between them, these categories account for around 60% of all households - and any of them might be receiving income on the side.

The government, which wishes to play down the true extent of tax dodges and benefit abuses, claims the black economy accounts for just 1.4% of GDP, but does not provide any statistical justification.

Six previous independent studies gave estimates ranging from 5.5% to 13.2%, with an average of 9.3%.

Much of Middle Britain - families that have worked hard and tried to improve their standards of living - falls into the category that pays the highest price for the black economy. That is because betteroff households lose a bigger chunk of their income to the taxman.

The richest 40% of households by disposable income end up with £11,660 less, after tax and benefits, than they started with - a reduction in real final income of almost 25% on average.

The middle 20% of households obtained an extra £430 on average, an increase of just 2.2%. The biggest gainers were the poorest 20%, whose final incomes are 2.9 times larger on average than their original income.

Most voters support policies that distribute-money from the rich to the poor for reasons of social justice. But honest citizens would surely demand reforms if they knew the extent to which their compassion is abused by tax evaders and welfare cheats.

The Economic Journal's study found that underreporting of incomes is more prevalent among blue-collar workers, whose figures needed to be scaled up by a factor of 2.18 to give a true picture. The corresponding factor for white-collar occupations was 1.64.

This suggests that underreporting is proportionally greatest in low- and middle-income groups, which also receive the lion's share of benefit transfers.

A crackdown on tax dodgers and benefit fraudsters would coax more of the 8m working-age adults who are 'unoccupied' into mainstream jobs.

Lower tax rates would increase incentives for hard work, innovation and entrepreneurship. This is the most effective means of raising the living standards of all Britons.

Honest households should not be expected to pay higher taxes to support the cheats.

At the very least, the government should commission an independent inquiry into the black economy and submit the findings to Parliament for debate.

Keith Marsden is a consultant to the United Nations and a former World Bank adviser.

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