VOICES GARETH MYLES
become non-compliant. The observed response to the tax increase will be the sum of all three. The most recent evidence in this area is the issue of whether the marginal income tax rate should remain at 50 per cent or be reduced. The work of HMRC (in agreement with the findings of the ESRC-financed Mirrlees Review) concluded that tax revenues would be higher if the top marginal rate of tax was less than 50 per cent. This shows that ‘refusal’ need not necessarily take the form of evasion, but can occur through other legally-permissible responses. Another example is the experience of the Community Charge, or ‘poll tax’, of the late 1980s. This tax was met with widespread refusal due to the perceived inequity, which was supported through a well publicised campaign of civil disobedience.
How are some countries able to keep tax levels which would be seen as a no-go in the UK? What does this say about the culture and values of a country such as Denmark where very high taxes are acceptable because they fund very good health, education and welfare systems? It is becoming increasingly apparent that individual attitudes toward tax compliance have a significant social element. In the academic literature this idea is captured by the concepts of tax morale, social custom, social norm, and network effects. All of these capture the idea that there is a socially- constructed and supported idea of what is acceptable and what is not. In this context, ‘acceptable’ relates to both sides of the social contract between the taxpayer and the state: what is paid in tax, and what is received from the state. When the behaviour of individuals is influenced by social factors there can be multiple
“ Individual attitudes
toward tax compliance have a significant social element
potential equilibria supported by distinct sets of social beliefs. This permits societies that are a priori identical to settle into different equilibria where the social beliefs are self-sustaining and coherent with the tax rates and state provision. For a given society to move from one equilibrium (perhaps with low taxes and low provision) to another (with high tax and high provision) may simply not be possible without some external shock to social beliefs. If one looks at the level of public expenditure in the UK before and after the First World War there is clear evidence of a step increase. This has been attributed to an ‘inspection effect’ where many of the privations of pre-war living were exposed by the experience of war, and led to a change in social beliefs about the appropriate level of provision.
”
Would the UK population welcome much higher taxes if the level of public-funded benefits were far greater? A common finding in opinion polls is that a majority of the population are willing to pay a higher rate of tax if the revenue is used to fund the health service. The experience of elections is that a party that offers this option is not elected. Two explanations can be offered for these contradictory findings. It is possible that the answer to the poll is given because of social pressure to appear generous and kind-hearted
28 SOCIETY NOW AUTUMN 2013
Professor
Myles says the opportunities to reduce tax
liabilities did not exist in an older, simpler world
to the pollster. Alternatively, the opinion poll may be eliciting the truth but the political promises on the use of revenue may not be believed. In economics the issue of credibility is an important one. The promises of political parties are unlikely to be judged credible, particularly on the uses of tax revenue. Behavioural economics has also shown that people can hold beliefs that are at variance to the facts. So it is possible that all people can believe that it is everyone except them that will benefit from increased government spending. These observations show why it would be difficult for such a change to receive support even without entering into the debate on whether public or private provision is best.
Does HMRC spend a disproportionate amount of resources on investigating small-scale tax avoidance (such as the landlord who doesn’t declare rental income) rather than large-scale tax frauds by individuals or companies? HMRC is charged with the objective of maximising revenue. This objective can only be achieved if HMRC makes a careful selection of who to audit with the intention of making the best use of audit resources. The actual strategy they employ is not public information. However, the economic theory tells us that the effort expended on an audit should be proportional to the additional revenue that is expected to be recovered. This implies that small-scale avoidance is worth pursuing if the audit can be conducted quickly and easily, while large-scale avoidance will be pursued even if considerable, but not excessive, effort is required. The best strategy will involve auditing at all levels of evasion provided the chance of successful conclusion is sufficiently great. n
i
Gareth Myles is Professor of Economics at the University of Exeter and a Research Fellow at the Institute for Fiscal Studies. He is Director of the ESRC/HMRC Tax Administration Research Centre (TARC).
Email
g.d.myles@
exeter.ac.uk Telephone 01392 724487 Web
tarc.exeter.ac.uk
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