Murphy's Law #3

Apart from Polly's articles, rarely have I encountered such a rich seam of bollocks as that spouted by one Richard Murphy of taxresearch.org.uk. Here is another article in which he "shatters" the "flat tax myth". The fact that the myth that he is shattering—that a flat tax magically simplifies the tax system in and of itself—is one that he has completely made up is, of course, utterly beside the point as far as Richard is concerned.

Today, he is shattering that damned myth in the Ukraine, quoting from the Kyiv Post.

The Ukraine is, of course, one of the so-called ‘flat tax’ states. It’s had a 13% flat tax since 2004. But all is not well.

First of all, the rate is going up to 15% in 2007. Second, and more importantly, as the paper says:

As a result of Ukraine’s still complicated and cumbersome tax system - often cited as a major reason why foreign investors avoid the country - specialists say that employers continue to declare lower official salaries to the authorities for tax purposes while paying their employees higher salaries under the table.

Which somewhat shatters two myths. The first is that flat taxes simplify things, and the second is that they end tax avoidance.

What.

The.

Fuck?*

Richard, the flat tax is simply one part of tax simplification: simpler taxes do "simplify things" (the clue's in the name, d'you see?) and they do make tax avoidance more difficult (nothing will ever, I suspect, completely end tax avoidance). The flat tax by itself is not a magic bullet.

Except, of course, what these people are doing in the Ukraine is not tax avoidance: these people are paying their employees undeclared income which is tax evasion and therefore illegal. Just to remind you, this man has set himself up as a professional adviser and is, apparently, unable to grasp the difference between tax avoidance and tax evasion, for fuck's sake.

Far from it, it seems. The explanation is obvious:

According to Ukraine’s tax legislation, employers currently pay 36 percent of their employees’ salaries to a social fund used for pensions, workers compensation, etc. In addition, employers contribute to a social insurance fund, the rate of which varies from 0.67 percent to 2.5 percent.
...

As a result, employers currently pay up to 51 percent of their employees’ salaries [in direct taxes], and starting in January, that rate will be as high as 53 percent, according to Ksenya Lyapina, the head of the Council of Entrepreneurs under the Cabinet of Ministers.
“Therefore, they [employers] prefer to pay low salaries officially, and market-based salaries in envelopes,” she said, adding that the 2 percent tax increase is unlikely to affect what people are paid in the workplace.

“It’s well known that people really have incomes double those that are declared,” she said.

So, actually, the flat tax is absolutely stuff all to do with it. It is the high rate of all taxes that is providing the spur to this tax evasion. A flat tax obviously does not make a difference here; if we introduced a flat tax in the UK of 60% then people would doubtless do the same thing as the Ukrainians.

In fact, of course, we know that they would. This is precisely why, when Lawson dropped the top rate of tax from 60% to 40%, his tax take went up: because it was no longer worth paying to find ways to avoid tax.

Unfortunately, our esteemed professional doesn't seem to understand this. Why is he so down on the concept of flat tax? Could he have a vested interest?

So, no flat tax miracle there then. Which is exactly as I predicted in my report on flat taxes for the ACCA.

Er, yes, he has; his professional pride (and fees). Nice one, Richard.


* This is going to be, it seems, a construction that I am likely to use a lot when considering Mr Murphy's meanderings: how else to convey my incredulity that this man has set himself up as a professional?