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Who is really paying the price of the downturn?

Posted by Chris Johnes Director, UK Poverty Programme

26th Nov 2012

Against a backdrop of tax dodging companies who shirk the need to pay into society, the JRF's annual 'state of the nation' report looks particularly bleak. As the difficulties facing ordinary people increase, and pressure on Government funds rise, it is imperative we make our tax system as fair and efficient as possible.

Another week, another report on the toll that the economic downturn, spending cuts and Welfare Reform are taking on the UK, while tax avoidance exposes continue to ripple through the media. 

This week's release of the authoritative annual Monitoring Poverty and Social Exclusion report, by the Joseph Rowntree Foundation, shows both the depth and breadth of poverty for many in the UK. The report illustrates the spread of poverty among those in work, and highlights the deepening of health inequalities, with ever widening divisions between richer and poorer areas leading to stark differences in life expectancy.  As Oxfam's own report, 'The Perfect Storm', showed this year, millions of people in Britain are facing the most severe squeeze on their incomes for 30 years.

One of the most worrying findings is the number of people in the UK now surviving on work that doesn't pay enough for them to stay above the poverty line.  Some 60% of "poor families" include at least one person who works, while the numbers of people claiming working tax credits has risen by 50% since 2003, with stagnating wages for middle and lower income earners.

The JRF has mapped out just how big the problem has become. Almost 5 million people - 1 in 6 of the workforce   have claimed Job Seeker's Allowance in the last two years alone, whilst as many as one in three of the working age population have seen their incomes slip below the poverty line during the last four years.

And this year there is worse to come, even if the economy doesn't further deteriorate. Planned Government reductions in both Housing Benefit and tax credits, combined with predicted spikes in food and fuel prices, will make life harder for those already striving to keep their heads above water.

It's illuminating to compare these reports of widespread poverty with the tales of tax avoidance that have hit the headlines over recent months, sparking moral outrage amongst public and politicians alike.  The tax affairs of corporations such as Apple, Google, Facebook, eBay and Starbucks have now become matters of public debate, as their attempts to avoid paying normal corporation tax levels have come to light. However the tax left unpaid - entirely legally of course - by these global giants, estimated at a cumulative £900m, is just a drop in the ocean.  It is less than one tenth of one percent of the estimated £120bn that the UK exchequer loses annually through tax evasion and tax avoidance.

This figure of £120bn is referred to as the 'Tax Gap' (Government estimates are much lower but based on conservative methodology).  This is money the Government should be collecting, if all tax payers did what the law requires.  And this tax gap is having a major impact on poverty in the UK. How many Surestart Centres would even some of this 120bn have saved?  How many nurses, how many youth workers, hospitals, schools? Over time, how many families could be lifted out of poverty with such an injection of cash into the economy and public services?   

The current reality is that the Government's deficit reduction programme becomes harder and harsher if it collects less tax - as this week's IFS report shows. With less money coming in, it needs to cut spending, and the coalition's current approach is to reduce social protection, cutting back on key services and sucking demand out of the economy.  As Oxfam's Perfect Storm report showed, when this happens, the poorest are hit the hardest.

Widespread tax evasion and avoidance seems to have become all too common among both companies and individuals - mostly the very wealthy. But, if you live in a society, someone has to pay to keep that society running smoothly.  Unfortunately, if the richest don't pay their fair share, everyone else ends up footing the bill as the state struggles to keep budgets afloat and afford vital services. 

Our tax system has now become a gross example of the way in which large companies and wealthy elites play by increasingly different rules to the rest of us. In the case of recent Corporation Tax changes, we can even see an example of the rich having different rules created for them. Meanwhile, the majority of society and, as has been rather belatedly recognised, the vast majority of smaller businesses who do pay their tax, lose out.

This is a pattern that Oxfam and others have long recognised in developing countries.  Inefficient tax systems are ripe for avoidance and evasion by those with good connections and good accountants, while the chances of the state funding decent health and education systems are severely undermined. Of course the UK has a more developed tax system and a wider tax base than middle income countries, let alone very poor ones, but the detachment of large corporations and the very wealthy from making normal tax contributions is a worryingly common factor now shared across the world.

Not only does non-payment of tax make austerity worse and distort competition, it also underlines and reinforces wider social difference and inequality. The damage that extreme inequality does to both society and economic health has been documented extensively by the academics Richard Wilkinson and Kate Pickett, and it becomes even more pernicious as tax revenue is removed from society exactly at the moment it is most needed.

So far the Government doesn't seem to be treating the issue with the seriousness it demands.  Apart from signing a derisory tax deal with Switzerland that does very little to prevent tax abuse and reducing staff numbers in HMRC, it denies the need for legislation promoting automatic exchange of information on individual and corporate tax matters.  Without such transparency, it's hard to see how tax evasion and avoidance can be effectively tackled.

As the difficulties facing ordinary people mount, and the pressure on Government funds rise, it is imperative we make our tax system as fair and efficient as possible. The means to do this - greater transparency and greater resources for the Revenue - are well established. Policy makers must now use them to help lift the burden on millions of people on low incomes, and help to rebuild a society owned and paid for by all.

Blog post written by Chris Johnes

Director, UK Poverty Programme

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Chris Johnes