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Why We Accept Inefficient Tax Systems And Tax Gaps

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As we all know there’s a vociferous voice out there demanding that the tax gap be closed. Anything and everything must be done – at whatever cost – to stop people dodging even there merest mite of duly deliverable taxation.

The argument is, of course, nonsense:

British online retailers are facing at least £180m in additional costs as the EU introduces new VAT rules on sales coming from outside the bloc.

Many small UK companies will have to pay €8,000 (£6,900) a year to comply with new rules set to take effect in July, according to consultancy Avalara.

Have to pay isn’t quite right, will have to carry the costs of is:

Companies can use the Import One-Stop Shop (IOSS) system to register to pay sales tax in the bloc, a process which the European Commission has estimated carries compliance costs of €8,000 per year.

So, how much tax is under discussion?

The rules are aimed at cracking down on VAT fraud among predominantly China-based ecommerce sellers, the cost of which is expected to rise to €7bn this year.

The compliance costs, merely in the UK, could be as high as £800 million, not that £180 million.

Note that this costs of 10% of the tax avoided is not to solve the problem, it’s to solve it in just the one out of many global jurisdictions. It’s a UK only solution that is, doesn’t include the costs of the other 164 out there (UN is 192 nations, EU is 27, minus the one that is us). The tax loss number is the global number, not just the UK contribution to it.

All of which tells us the grand truth about tax gaps and all that. We like leaky tax systems, positively lust after them in fact. Because we are not in fact trying to have 100% ironclad ones because the costs of doing so are vastly higher than any benefit.

Our aim is, after all, to optimise the balance between raising the money necessary for government while also minimising the costs – in lost economic production – of gaining that cash flow. Spaffing vast sums on paperwork is a waste in such an equation.

Sure, we need some paperwork, sorry but that’s just the nature of the beast. But how much? Up to and until the costs of the paperwork start to damage economic production to leave us with a non-optimal solution to our revenue and size of economy trade off, obviously.

This is true of Companies House regulations, accounting reports, information to be provided to civil society, reports on gender and race gaps, tight as opposed to leaky tax systems, country by country reporting, sustainable accounting and – well, you get the picture. Everything our vociferous voice demands comes up against this problem. Optimal systems take into account the costs and opportunity costs of such plans – which our voice never does.

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