Sunday, 25 March 2012

The coalition's dodgy dossier - Questions that need to be answered

Waking up this morning, Cameron's government has more immediate concerns than the fall-out from the Budget. Cash for access is nothing new (Greg Palast exposed LLM and New Labour ministers in 1998), but it will further batter Tory poll ratings ahead of the May elections.

However, I think there's another scandal about to emerge, which also has echoes of another New Labour previous: a dodgy dossier.

The document is the publication by HM Revenue & Customs (HMRC) used to underpin Osborne's case for reducing the 50% tax rate to 45% in the Budget. (Richard Murphy has also raised questions about the dossier and its conclusions)

Now we know the HMRC has form (e.g. tax deals with Vodafone, Goldman Sachs, and numerous other multinationals and wealthy individuals). But it is still an executive agency of HM Treasury and staffed by politically neutral civil servants.

There are echoes again of HMRC's lax attitude to tax avoidance in this statement, which bears deeper analysis:
"there was a considerable behavioural response to the rate change, including a substantial amount of forestalling: between £16 billion and £18 billion of income is estimated to have been brought forward to 2009-10 to avoid the additional rate of tax. This behavioural response is entirely legitimate, and difficult to prevent using anti-avoidance legislation."
The first issue with this statement is the value judgement that avoidance activity is "entirely legitimate". It's true to say that New Labour was stupid in signposting with a year's notice a tax rise to the super-rich, but what does it tell us about the culture of HMRC at the highest levels, that they believe rich people avoiding tax is "entirely legitimate"?

The second issue with this statement is what it - and the dossier throughout largely - doesn't say: that this was a single year effect. It is obvious that high earners would bring forward bonuses, dividends etc by a year to avoid paying so much the following year when the 50% tax rate came in. But that cannot be repeated, so the £16-18bn in years two and subsequent would give us an extra £1.6-£1.8bn in revenue.

Although the document is largely carefully couched and liberally littered with pharses like "the estimates above are subject to a wide range of uncertainty" that is not reflected in either a) what Osborne said the Budget; and b) it's own ridiculous conclusion.

Cunningly, the dossier's conclusion is not to be found in Chapter 6: Conclusions. Instead, the real conclusion is to be found in the extra-dodgy Annex A - Table A2 of which contains Osborne's highly dubious claim that reducing the rate to 45% will only cost the Exchequer £100m (allowing him to claim his stamp duty changes will raise five times as much).

Much of the document is based on an academic concept: Taxable Income Elasticity (TIE) which in simple terms looks at the responsiveness of taxable incomes and tax revenues to different tax rates. Again in simple terms, the lower the TIE score the lower the opportunities for avoidance.

For the purposes of the document, HMRC uses a TIE of 0.48 (see Chapter 5), yet the calculations used in 2009 (when the 50% rate was announced) were based on a TIE of 0.35.

But HMRC is not a neutral academic observer of TIE. Its role - surely (at least in theory) - is to maximise tax revenues, a large part of which is to mitigate against tax avoidance. Even Osborne in his Budget statement said "I regard tax evasion and – indeed – aggressive tax avoidance – as morally repugnant".

So if HMRC identifies a higher TIE, it should not be simply reporting it, or worse suggesting tax rates should fall in response, but producing a practical strategy to minimise avoidance.

So the questions that need to be asked are these:
  1. Was there an earlier draft (or drafts) that was less conclusive?
  2. What input was there from ministers or their special advisers?
  3. Who signed off the final document?
  4. Why was the HMRC commissioned to do this analysis and not the 'independent' OBR?
  5. Why was a TIE of 0.35 used (presumably by HMRC) in 2009, but a TIE of 0.48 used in 2012?
  6. Why did HMRC not suggest practical steps for reducing this avoidance?
  7. Will HMRC and HM Treasury publish all correspondence relating to the commissioning and drafting of this dossier?
  8. What behavioural analysis has HMRC or HM Treasury completed or commissioned on the effects of the new changes to stamp duty?

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