Monday, 5 November 2012

Cash, crime and the dodging of taxes


We've become pretty judging of others - and especially businesses - for what we see as the dodging of taxes. Yet, a few saints and cabinet ministers aside, we all contribute to the informal economy - paying for stuff in cash knowing that half goes in the tradesman's back pocket being the obvious (but not exclusive) example.

Community Links have been doing a sterling job trying to unpick the informal economy, to build our understanding and to direct our attention to creating a pathway to what they term "formality":

It is important to note that the rationale for working informally and barriers to formalisation vary, therefore different policy measures are required for different types of informal entrepreneur. The report sets out some suggestions for policy responses which are suitable for differing types of informal entrepreneur, yet it is recognised that there is no ‘quick fix’ solution and there is a need to involve a wider range of stakeholders in attempting to develop bespoke policy solutions.

The premise for this argument is, of course, that the formalising of informal businesses is ipso facto a desirable thing. And the only reason for that desire is, of course, that informal business is untaxed. Indeed, Community Links rejects a laissez faire approach that says "so what":

From the evaluation of policy approaches provided in the literature review, it is obvious that neither a ‘laissez-faire’ approach nor a ‘de-regulationist’ approach should be pursued due to the negative overall impacts on the economic landscape. 

However the key argument presented against a deregulatory approach appears to be an very odd one:

In sum, even if de-regulation was to reduce the magnitude of informality, the impact would be to widen inequalities and reduce working conditions compared with more regulated states.

You will, of course have noted the contradiction in this statement. If someone is better off in a formal, regulated state then that is what he will choose, surely? Why operate outside that status if there is no advantage? Once again we are seeing the innate prejudice against free markets that is built into so many studies of these sort. Commissioned by governments and those who serve the cause of governments, there can be no place for independence of spirit. Rather we must create means by which formalisation can take place - without removing the obvious financial advantage of 'the black': you don't pay taxes.

Equally weirdly, the conclusion of the authors in this case argues for formalisation because people are "social actors":

In this report, we define ‘formalisation’ simply as the process by which informal work becomes compliant with employment, tax and benefit laws This views individuals not as ‘rational economic actors’ but as ‘social actors’ who are ordinarily inclined to comply with the law, partly because of their belief in the rule of law, and partly as a matter of long-term self-interest (Murphy, 2005).

While I don't wish to wander off down one of the by-ways of sociology by discussing rational behaviour and the utter nonsense of arguments claiming some different (and presumably irrational) social behaviour, it does seem to me that most actors in an informal market see little point or purpose in the "long-term". Like that famous economist they know - better than most - that in the long-term they are dead.

At the heart of informality is arbitrage - exploiting the gap existing between the formal economy and the black. An obvious example can be seen in the smuggling of booze and fags (or indeed cheese). Since government chooses to regulate the price of these desirable products - and indeed to constrain who I can sell them too - there is a wonderful arbitrage opportunity. And the bigger the regulatory gap, the bigger the opportunity and the greater the profit. It is no surprise that of the top twenty "tax dodgers", half are cigarette smugglers.

When we get to the prescription from the Community Links authors, we get a delightful - almost sweet - naivety and sense that they don't have the first clue how the bounds between crime and 'informality' are blurred. They propose measures like:

...offering amnesties on either a societal or individual level to informal entrepreneurs who put their affairs in order; offering business advisory and support services to those formalising their business ventures; and providing a range of targeted direct or indirect tax incentives encouraging customers to use formal rather than informal enterprises

Since we are speaking of a cash economy here - with no duty, no taxes and no questions asked - what makes anyone think that "amnesties" are any use? Think of the jobbing builder - the local handyman, if you will. He's playing the game of 'one pound for the books, one for my pocket'. The only risk is that the revenue will investigate and end up doing what? Giving him a tax bill that he'll pay off across two years by agreement.

For the proper criminal - the one gaming the gap between duty in Turkey and duty in the UK - no amnesty on earth will work since it implies taking his business away. More to the point, this smuggler knows the down side risk is a jail sentence. But right now he's making a packet and even with the 'Proceeds of Crime Act' the cops will never track all that money. Assuming, of course, they catch him (what's the extradition treaty like with Turkey?).

Finally our Community Links writers fall into the fault of moralising - as if this with attract anything more than a snort and a snigger as the man on 'the black' carries on:

Such measures include tax education and awareness campaigns about the benefits of declared work, and the pursuit of perceived tax fairness, procedural justice and redistributive justice.

Given who we are dealing with, this appeal to some collectivist morality seems beyond parody. Our criminal tax dodger simply isn't going to play. Why on earth should he? He'll listen to your lecture, smile, pour himself a large one and toast the naivety of the government.

In the end, setting up a new quango (as our authors suggest) may be good business for them and great business for Community Links but it fails entirely as a strategy - assuming that we actually need such a strategy. We've known for years that there's a pretty big gap between reported income and reported expenditure - especially at the lower end of the socio-economic scale - that can't be wholly explained away by levels of borrowing. Indeed the very fact of the informal - often criminal - economy says that this gap must exist. Just take estimates of the illegal drugs market:

An online report published by the Home Office in 2006 has estimated the UK drugs market to be worth £4.645bn in 2003/4[8], with a margin of error of +/- £1.154bn. 

Do our authors really think that this market - or the growing market for smugged fags and illegal vodka - is going to go away because of "tax education" or some sort of "tax incentive" to customers?

In the end those working in the cash economy - whether they're declaring some income or pretending to be out-of-work - aren't going to regularise their circumstances unless you either make it worth their while doing so (which means lower taxes and duties) or remove the opportunity for arbitrage (which means lower taxes and duties).

Always and everywhere, the black economy is a consequence or crime or high taxes - or both. Pretending otherwise or that we can change the ways of these people by lecturing them about fairness and redistribution is ridiculous.


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