Thursday, April 21, 2005

The Cost of Government

I read in The Economist that the cost of collecting US taxes is estimated at between 15-20% of the gross figure. I was curious to know how well the Inland Revenue does in comparison and was surprised to find that, according to the National Audit Office, it does ten times better. The cost of collecting income tax in the UK is just over 1.5%. Less than managing agents charge to collect rent. Less than estate agents charge to sell houses. Weird.

This is truly extraordinary. In a country where the National Health Service is as inefficient an organisation as could be conceived (delivering worse health at higher cost than any equivalent) and where most public sector organisations appear to be chaotic and anti-productive, the tax collectors are superbly efficient. How come? Why don't we distribute these paragons around the other public services to get wider benefit from their super-powers?

I cannot find much more information on this subject on the internet. I wouldn't mind betting that the difference is accounted for more by the method of measurement than reality. Maybe the US figures include the cost to taxpayers of compliance? Certainly the UK figures do not, and the amount of money and time expended in dealing with the Inland Revenue is a major cost to the UK economy. When the Inland Revenue calls, you drop all production and deal with them - such are their powers.

The Economist is advocating a "flat tax" for the UK, similar to that in Russia. As a Russian taxpayer, I can certainly confirm that the tax authorities here are easier to deal with. There are no complicated allowances; no higher rate bands. You declare your income and pay 13% of it. As simple as that. I signed my tax return this week and (unlike any I ever signed when I was a UK taxpayer) I understood it - even though it was in Russian it was clearer English than anything the Revenue ever managed!

Collection costs in flat tax regimes are confined to basic clerical work, investigative work on suspect returns and collection of unpaid bills. There's a PAYE system in Russia too, so I found that my company had paid most of the tax already and I have to write a cheque for a small balance. I can't find any numbers for the percentage cost of collection in Russia, but it must be pretty low.

Does anyone out there have comparitive data? It strikes me that a flat tax might be a good place to start in rolling back the British State. If nothing else, a country with fewer tax collectors must surely be a happier place - and as they are apparently Britain's most efficient Civil Servants they could be redeployed to run the Health Service to wonderful effect.


Anonymous said...

"tax collectors are superbly efficient" ???

The article must be discussing some parallel universe version of the Inland Revenue/EDS/Accenture self perpetuating bureacratic empire.

It may seem to cost less per taxpayer than in some other countries, but that is because the service to their "customers" is so bureacratic, jobsworth and simply wrong.

Even with the billions wasted on IT technology over the years, they are incapable of calculating the tax owed correctly, and have, over the years managed to systematically issue millions more "official" National Insurance Numbers than there are people living in the UK.

Their record on tax rebates, pension credits, childcare allowances etc. dismal, and does not give any confidence for their ability to move to any "flat tax" system etc.

Tom Paine said...

Ever heard of irony, anonymous?

Serf said...

The State never factors in the costs that are not directly borne by its own employees.

So as you rightly say a company or person will have to drop everything they are doing to comply with tax authority requests.

This hidden cost of complication is another major reason why we need a flat tax in the UK.

Snafu said...


I read that it costs £1.7bn to collect income tax in the UK in 2003/4. The final point in my manifesto!!