Tax Research UK: Closing The EU Tax Gap

February 29th, 2012

This report has three objectives. It:

  1. Explains the ways in which tax evasion occurs within and between EU member states;
  2. Estimates the total losses to EU Member State Treasuries arising from that evasion and tax avoidance;
  3. Identifies policy options, from the modest to the radical, for intensifying EU and Member State action against such abuse.

Using consistently credible sources the resulting estimate of tax evasion in the European Union is approximately €860 billion a year. As the report notes, estimating tax avoidance, which is the other key component of the tax gap in Europe, is harder. However, an estimate that it might be €150 billion a year is made in this report. In combination it is therefore likely that tax evasion and tax avoidance might cost the governments of the European Union member states €1 trillion a year. These losses can only be accurately located with regard to tax evasion. Italy loses the most in Europe as a result of tax evasion. Its loss exceeds €180 billion a year. Estonia is, however, the biggest loser when the tax lost is expressed as a proportion of government spending. More than 28% of Estonia’s government spending is lost to tax evasion each year.

This though is not just an individual country problem: taken together tax evasion in the EU costs more than total EU health care budgets, and if that tax evasion could be stopped total EU deficits could be repaid in just 8.8 years. In Ireland it would, admittedly be longer, taking some 23 years, but the message is a very clear one, and that is that at a time of fiscal crisis we can no longer ignore the fact that tax evasion and tax avoidance undermine the viability of the economies of Europe and have without doubt helped create the current debt crisis that threatens the well being of hundreds of millions of people across Europe for years to come.

As a result the report looks at ways to tackle both tax avoidance and tax evasion in Europe to help redress this problem. It does so in a totally new and innovative way, developed for the purpose of this report. By splitting tax avoidance and tax evasion activities into generic types it is firstly seen that some such issues are currently beyond likely policy redress within the EU. So, for example, much tax avoidance could only be stopped if there were to be a fundamental change of view on the need for the free movement of capital in Europe, or to the right to incorporation at will. Other tax avoidance measures require a fundamental change in attitude towards taxing the family unit and many more would require change only possible at the member state level and therefore beyond EU control. That being said though the report does then develop a series of recommendations for action that build on a consistent them, relating to both tax avoidance and tax evasion that is developed within the report. This might be called the ‘smoking gun’ approach.

This smoking gun approach recognises that individual action against tax evaders and avoiders is never going to eliminate this problem by itself. The scale of the problem is too big for that to happen. That means that what is required is the disclosure of information either to tax authorities or on public record or within accounts that will most successfully draw attention to those tax evading and tax avoiding and so increase their risk of being found out to be doing so. The result is that this approach is designed to deter these activities.

This is not to deny that direct action has a role to play in many cases, and a specific recommendation is made that more resources need to be allocated to tax authorities across Europe to make sure that direct action can be taken. Providing those taking such action with access to the best possible data on who is avoiding and evading is, however, vital to the cost effective success of any such campaign to collect more tax and so prevent economic meltdown in Europe. That is what these recommendations are intended to do.

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