WE HEAR a lot about the “tax gap” — the gap between what the Government gets and what it expected. And, apparently, tax avoidance is a big reason for it.

But it is not clear what the Government bases its expectations on. For example, if company profits rise, it seems to expect more corporation tax. However, tax liabilities are not based on economic variables but on legal fine print, thousands of pages of it — more and more every year.

Those who try to plan their affairs on the basis of the law are described as tax avoiders, acting against the “intention of Parliament” — for all the world as if there were any serious parliamentary scrutiny of this verbiage. If Parliament has any intentions about tax, it is not able to express them clearly.

As for tax avoidance, it seems to mean any use of the tax laws to produce a result the commentator does not like. Some so-called “unacceptable avoidance” entails dishonesty or concealment — this is simply tax evasion. But the term also catches what used to be called tax planning.

Taxpayers in a predominantly market economy must be able to plan their tax liabilities, just like all the other costs they face. This is how modern economies can produce transfers of income of between 30 per cent and 50 per cent of GDP (depending on voters’ preferences), while enabling individuals and businesses — and government departments — to budget and plan for the future. Otherwise we might as well have a command economy and not worry where the money comes from at all.

This flawed tax gap analysis is creating more and more complexity. Anti-avoidance is a catch-all justification for any new rules, and, almost invariably, these are more complex than the old.

The UK is not an outrageously high tax country. But its tax system is complex and has got steadily more so over the past 20 to 30 years.

Complexity imposes costs on individuals and businesses that can afford advice and real injustice on people who cannot. Complexity makes it harder for the Government to estimate its tax revenues reliably. And, of course, complexity enables some taxpayers to use the tax laws to achieve results that the Government does not like. It is now very common for tax schemes to be based on exploiting the complexities of previous anti-avoidance legislation.

A conspiracy theorist might argue that this was deliberate. It is always easier to present tax changes as striking a blow against avoidance than as increasing the effective burden of taxation. And if the change begets more avoidance — well, that helps to justify future changes.

But, conspiracy or cock-up, the effect is the same. We are in a hole of complexity and, ignoring the former chancellor Lord Healey’s advice in such circumstances, we are still digging.

It is not as if the Government is failing to increase tax revenues. The corporation tax take — £50 billion targeted next year — is unprecedentedly high, both by historical UK standards and in international league tables. And that is only the tip of the tax iceberg faced by companies — employers’ national insurance alone nets more than this.

So what is the alternative? Well, instead of abusing tax planners the Government could do a little planning itself.

First, base tax rules more on real economic behaviour and results. This means simpler law and less legalese. It means using commercial concepts and trusting the courts to interpret what is really going on. The authorities have won cases in the courts where the intended tax consequences of a real economic outcome are actually clear. But they still lose cases where there are just detailed rules with no discernible spirit.

Secondly, where — inevitably — a purely legal line has to be drawn, cost the measure on the basis that people will tend to plan to be just the right side of it. Do not change it every few months — particularly not retrospectively — so that neither you nor the taxpayer has any idea what is going on. In short, try going back to the rule of law.

Third, learn from the neighbours. I do not mean the other “wasp” political cultures — notably the United States — which tend to share your bad habits. Even learn from the European Union institutions that are trying to reduce the economic distortions, compliance costs and lack of competitiveness arising from discriminatory national tax systems.

The danger is that the Government will not listen unless big companies leave the UK. So far, it has just stopped short of prompting this, but it only needs to get it wrong once to drive a lot of business away. Certainly, more UK-based businesses are treating the possibility seriously than ever before — not to mention businesses that, because of the tax climate, do not even come here.

And even if big companies can afford some complexity, it means that small businesses never form or expand — never take on their first employee and enter the nightmare world of PAYE — not to mention those on low incomes, who cannot realistically afford tax advice. The trouble is, tripping up basically law-abiding people over PAYE compliance is easier than tackling the black economy. As Homer Simpson explained to Bart, “That’s right, son, if a thing’s hard it means it’s not worth doing.”

• John Cullinane is deputy president of The Chartered Institute of Taxation, which argues for simpler, more effective tax legislation for businesses and individuals, including those who cannot afford advice.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive