1. Why bother with the tax gap?
Richard Murphy
Professor of Practice in International Political Economy
City, University of London

2. Purveyors of disruptive ideas, then…..

3. and now

4. Tax and spend, or spend and tax?
Before we get to the tax gap, what comes first? Tax, or government spending?
The answer has to be government spending
Why?
Because governments insist in being paid tax in their own currency
So they have to spend it into existence before tax can be paid in that case
So, it is always true that governments spend and tax
They never tax and spend – even in the case of the Euro

5. This is as revolutionary as new understanding on money
In April 2014 the Bank of England admitted:
The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
Economics had to come to terms with money not being what it thought it was: saving does not permit lending. Deposits are actually created by lending
And now it has to accept that government spending creates the capacity to tax

6. Tax does six things in that case
Reclaims the money a government spends into the economy
Ratifies the value of money because the government will accept it to pay taxes
Reorganises the economy – fiscal policy
Redistributes income and wealth
Reprices goods and services when there is market failure
Raises representation in democracies
Those are the six Rs of taxation
But tax does not pay for government spending – money printing does that

7. What’s the tax gap then? Tax gaps come in two broad types:
Tax policy gaps
Tax compliance gaps

8. Tax policy gaps
The difference between the amount of tax that would be due if there was:
Perfect tax compliance, and
No allowances and reliefs given to taxpayers
and:
The amount of tax collected with perfect compliance and all the reliefs and allowances in the system being claimed

9. Tax compliance gaps
The difference between the amount of tax that should be paid if the tax system worked as a tax authority of a jurisdiction thinks it should (i.e. the net sum after the tax policy gap has been calculated) and the amount of tax actually paid.
The tax compliance gap is made up of:
Tax evasion (which is always illegal)
Tax avoidance (which is in the grey zone where no one knows what is legal), and
Not making due payments on time, or at all

10. Why does the tax gap matter?
The tax gap is important because:
Tax is not a technical exercise in revenue raising that is required to fund government spending;
Tax is instead one of the most effective ways in which a government delivers its social, economic and industrial policies;
The existence of the tax gap undermines the effectiveness of the supply of government policy.
The importance of the tax gap is not that government’s can’t spend because of it, because it can always do that. It’s that:
They can’t control their economies as they want if they have a tax gap
They can’t deliver their promises to electorates on policy issues as they want

11. This puts the tax gap at the centre of political economy
It also means we need to know a lot more about tax gaps:
How big is the tax compliance gap, by tax, because this indicates social and economic priorities, and almost no government knows what this figure is?
How big is the tax compliance gap by tax because this has massive social and economic consequence if we do not know it?
And, crucially, what can be done about it?

12. But none of this matters if we don’t even understand tax
Which is why I suggest we need a Modern Taxation Theory
Adam Smith needs updating, starting now