Monday, January 11, 2010

Clueless English Government Raises Tax Rates, then Wonders Why Compliance Is a Problem

Academic research is fairly unanimous that high tax rates cause tax avoidance and tax evasion. Not many people, after all, are going to take big risks or engage in inefficient tax planning to escape Hong Kong's low-rate flat tax. But people begin to figure out ways of keeping more of their money as tax rates climb above 20 percent and they are very interested in protecting their income when tax rates reach confiscatory levels. In the United Kingdom, for instance, the top tax rate is being raised from 40 percent to 50 percent, which will almost certainly lead to more tax dodging. So now the U.K. government is setting up a panel to figure out how to reduce the "tax gap." Sadly, it's a near certainty that the only good answer - lower tax rates - will not be one of their suggestions. reports:

The UK government has announced the formation of a new panel of experts to recommend changes that aim to reduce the size of the 'hidden' economy and the 'tax gap' between taxes legally owed and those actually paid. ...Mike Eland, HMRC's Director General of Enforcement and Compliance...commented: “We estimate that the hidden economy contributes to around 7.5% of the net tax gap, which means we could be losing in the region of GBP3bn a year from people who are living and working in the hidden economy. They also gain an unfair competitive advantage over businesses that pay their taxes. This new group of experts with a variety of experience will identify new practical steps to tackle this problem.”

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