Yesterday I argued that 38% seems to be as high a proportion of UK GDP as possible for a democratic government to take in tax. I pointed out that no government in the last 40 years has tried to take more than 38%. I reminded readers that the Treasury itself is now forecasting declines in self assessment income tax and CGT against the backdrop of higher rates. Maybe Labour were right that the practical limit is lower – they have never tried to raise more than 36% from UK taxpayers. They have preferred to leave incoming replacement governments to deal with the big borrowings they used instead of extra taxes to allow them to spend and spend.
I agree with those of you who said it would be safer if a government taxed at a lower rate than the current 38%, and agree that a rate around the 31% lower limit of the last 40 years expereince would generate faster growth in the economy than the current tax level. However, getting anywhere near there is difficult, and will itself need growth to help bring the figures into sustainable shape.
Today I wish to draw attention to the difficulties countries like Greece and Spain are having collecting their taxes. Both countries have keen deficit cutting governments. Both governments want to close a lot of the gap by taxing more. Both realise that their economies have lost substantial revenue already, as people put their assets and cash offshore, and as locals trade more and more in cash or by barter to evade and avoid taxes.
Spain is trying an amnesty for people who have been evading and avoiding. It is also offering a knock down 10% single levy on any money Spaniards choose to bring onshore or to find under the mattress with no questions asked. They need the estimated E 2.5 billion this will bring in. That shows they think there is an easy E 25 billion to come home. It would also mean they could tax it and the income it generates in the future, as they will then know where it is and who owns it. Maybe tax dodging Spaniards will not regard this as such an attractive offer as their government.
The Spanish government is encountering resistance to its latest extra property tax. Property taxes anyway are likely to be weak compared to the boom conditions prior to 2008, as Spanish property is in turmoil after the Credit Crunch.
In Greece travellers tell me the economy functions with a lot of cash transactions. Apparently many Greeks do not see government as a good institution to trust with a share of their earnings, so they would rather shelter as much as they can. The Greek government believes this is true, and is pursuing various anti evasion campaigns to try to get them to pay. When a country feels it is above the tax saturation level all sorts of people decide they will no longer play by the rules. Some go in for every tax avoidance trick they can find, others break the law and go in for evasion.
It is no good governments getting on their moral high horse about run of the mill avoidance. After all, they are the main proponents of it. In the UK the government encourages people to avoid tax by buying tax privileged government debt, by saving in Pension funds and ISAs, and in the past paying some of its own employees through companies.
Most people go in for a b it of tax avoidance. Now there are high Stamp duties on property, buyers and sellers tend to choose prices just below a Stamp Duty threshold rather than just above. Some people choose their service providers from smaller craftsmen and women who are below the VAT threshold. Why shouldn’t they.
The danger as you approach tax saturation is more people, including those in professional careers and positions of trust, start moving from a bit of legal avoidance to a spot of questionable avoidance/evasion. When the doctor, teacher, lawyer or even the local accountant is happy to pay cash for his building work or even to accept a special cash quote you know your country is moving from the rule of law to the wilder south of Euroland’s non compliant culture. The informal economy may bloom from 5-10% of the total to 20-25% as some Latin countries believe has happened to them already. Then governments have a problem. They start offering amnesties, in a desperate bid to get some money back. The question is, will enough citizens play ball? If they think general taxes are too high and likely to go higher, they may prefer to chance their arm and keep the money hidden.
This site is of course against all illegal actions to evade tax and does not wish to post comments from people alleging infringements by themselves or others without proper evidence. Good legal tax saving tips are fine, but are well covered by the financial pages of papers and the adverts of the savings industry and the government.