The Tax Gap (Redux)

A week ago I published a short critique of the Corybnistas’ El Dorado: the £120bn Tax Gap. You can read it here. And you can read here the response to that critique published by Richard Murphy – the man named in the Corbyn Manifesto as being responsible for that estimate. I didn’t respond to Richard; I was happy to leave readers to make up their own minds.

Yesterday’s Times Editorial, too, took issue with that £120bn figure. It said it was a “fairytale” that £120bn could be raised by clamping down on evasion.

Richard Murphy took exception to that editorial here and this, pertinently, is what he said:

And then that suggestion that £120 billion can be collected: no one has said it; least of all me; least of all Jeremy. We have both pointed out the scale of the issue (I have heard him do so). But has anyone said we could get it all? Of course not: I have estimated £20 billion could be raised for an investment of £1 billion, or more. But The Times has just made the claim that all will be collected up.

In other words the ‘useful’ Tax Gap – the bit that it is said is practically collectable – is not £120bn but £20bn.

So three questions emerge: does the Corbyn Manifesto invite readers to conclude that £120bn is available; what is the source of the £20bn; and what sum might actually be available? Let me address those questions in turn.

The Corbyn Manifesto

What the Corbyn Manifesto says about the Tax Gap is this:


The Manifesto makes no mention – at all – of the fact that only a sixth of that £120bn is collectable. But it does talk of El Dorado yielding “enough to give every man, woman and child in the country £2,000.” You can make your own mind up about whether the Manifesto did intend to suggest that £120bn could be raised.

The source of the new £20bn figure

Richard and I are friends. But he is a prolific commentator and I do not manage to read all that he writes. So although I have no recollection of any previous work of his calculating a return of £20bn for an investment of £1bn it is possible that I have missed it. I invite Richard to direct me to those calculations. It would be a pity for the country if the Labour Party was invited to choose its leader and commit to a search for that fabled City on the basis of a finger in the air.

What might be collected

Writing in the comments section of last week’s Tax Gap post I observed:

To believe that there are huge revenues waiting to be collected – in other words that the tax gap is more than a KPI for HMRC and is an undeveloped and meaningful source of revenue – you have to swallow some pretty unlikely propositions. £120bn is about a fifth of all tax revenues. There is no political gain for any Government in just leaving that money lying there. It’s about what will be raised from the 40p rate and the 45p rate together in 2015/16. You have to believe that the Tories would rather leave that £120bn uncollected then cut the top rate of personal income tax to 20p. Respectfully, that defies plausibility. You also have to believe that the last Labour Government did this too: £120bn hugely exceeds gross per annum spending on the NHS in the last Labour Government; did Labour really choose just to leave that money lying on the ground?

So enormous was the initial estimate of £120bn that dividing it by six does not diminish the force of these points. £20bn is more than five times gross receipts from inheritance tax; it is a much higher multiple, still, of the yield from the 45p rate of income tax; and it is about seven times the bank levy. So to believe that there is £20bn waiting to be collected is to believe that Osborne has considered whether to abolish inheritance tax and the 45p rate and the bank levy and gain an extra £10bn and decided to do none of these but rather, instead, leave that £20bn uncollected. Is there any plausible world in which Osborne might make that political call?

Richard doesn’t seriously dispute that analysis. His view is that Osborne has deliberately made that policy choice. Here’s what he said on twitter:

And you either agree with that or you don’t. There’s no reasoning you out of it.

Now there is a serious argument that the Conservatives have under-invested in HMRC. FTE staff numbers are down by well over a third from 2005. And the Department is not protected against further cuts. It’s a peculiar choice to slash investment in your only revenue raising department at the same time as you seek to grow revenues. But sensibly estimating a theoretical yield from some theoretical extra investment? That’s a bit tough for me. But the fact that, as I pointed out here, the Tax Gap has remained stable in absolute terms (fallen in percentage terms) despite the cut in staff numbers does not suggest that there are huge net yields in store from raising investment.


Note. Richard has responded to this post here. He links to his report on the Tax Gap and builds on some 2013 figures from ARC (the Union that represents senior staff in HMRC) which call for an extra £312m of investment that, they project, would deliver £8.26bn of tax (£26 for every £1 invested). You can read the ARC document here. The basis for ARC’s projections are not clear from the document.

Richard goes much further than ARC. He says that, in addition to ARC’s £312m, HMRC should spend a further £1bn which would yield £12 for every £1 invested. And £8.26bn plus 12 x £1bn gets you to £20bn. But no specific case for spending £1bn is advanced and nor does Richard offer any reasoning given for the projected 1,200% return on that £1bn.

Whilst, as my original post made clear, I think there is a strong case for examining the amount invested in HMRC I find it difficult to extrapolate from Richard’s post any evidential rationale for the supposedly realisable £20bn return.


I am not accepting comments that do not make forensic points about the quality of my, or Richard’s, analysis. Where comments contain (but are not confined to) a forensic point I will edit them to remove all but that point and mark them as “edited”.

What Use the Tax Gap?

Every year HMRC publishes its estimate of the so-called Tax Gap.

What is it?


So the Tax Gap is predicated on Parliament’s intention in making the law. It measures (what HMRC considers to be) the difference between the tax Parliament intends should be collected and the tax HMRC actually collects. It doesn’t measure the tax that Parliament hasn’t asked HMRC to collect. So if Parliament doesn’t intend to levy, for example, a window tax the fact that there are no receipts from a window tax won’t make the Tax Gap bigger. If you wanted to measure the tax that might be collected if we had a window tax you’d first calculate the size of the Tax Gap – and then you’d add whatever yield a window tax might generate.

Another important thing to note about the Tax Gap is that it’s reasonably stable in both absolute and relative terms.


The latest estimate of the Tax Gap can be seen here. I’ve said it before and I’ll say it again: although it is inconvenient to Labour  – I am a Labour Party member and it is inconvenient to me – the Coalition did a reasonable job of shrinking the Tax Gap.

And HMRC are generally thought to be doing a pretty good job in measuring it. Here’s the NAO late last month:


Of course, it’s theoretically possible that HMRC and the National Audit Office and the IMF are all wrong and the Tax Gap is massively understated. Possible, but unlikely.

I apologise for labouring these points. But they’re important because, along with £93bn of so-called Corporate Welfare – which I’ve addressed at some length here – closing the Tax Gap forms a central plank of so-called Corbynomics.

Here’s what Corbyn says about it:


So is there really £2,000 for every man, woman and child in the country in closing the Tax Gap?

No. Unambiguously no.

Here’s how you get to that conclusion in three easy steps.

(1) There’s no worldwide conspiracy involving HMRC, the NAO and the IMF to hoodwink us as to the size of the Tax Gap. The Coalition Government wasn’t party to such a conspiracy – and neither was the last Labour government before it. HMRC does a decent job in calculating the size of the Tax Gap.

(2) The reason the Tax Gap is where it is is because it’s extremely difficult to close. Every Government ever has come into office saying it will tackle avoidance and evasion – but still we have a Tax Gap which is reasonably stable in amount. There are only two explanations for this. Either every Government ever has deliberately chosen to leave the Tax Gap where it is. Or try though you might a certain amount of leakage is inevitable and all you can hope to do is narrow the gap a bit. Those are your choices – and only one of them is plausible.

(3) Some other number might measure some other thing. It might measure what Parliament could levy if it changed the law. And that other number might even measure that thing plausibly. But raising £2,000 for every man, woman and child involves identifying what that change in the law is – a new window tax for example – and identifying how much it will raise. The extract from Corbyn’s manifesto given above – purportedly supporting the £120bn yield – doesn’t identify any new tax. And Corbyn’s record on calculating yield is poor: I give an example here.

So what use, then, is the Tax Gap? Well, HMRC tell us:


The mundane truth, I’m afraid, is that it’s a sophisticated performance metric for HMRC. It measures how well they’re doing and where they should target their resources.

The Tax Gap is not a serious tool for making broader economic policy. It is no magical pot of gold that will obviate the need for close engagement with the choices inherent in being in government. And it’s not a basis upon which you can pitch to a sentient electorate. It just isn’t.

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