Oldest profession, newest target for the tax man

diane coyle says legalise prostitution

It is often said that there are two certainties: death and taxes. If you're running a massage parlour or a hostess agency, there's only death. There is an overwhelming economic and social case for legalising prostitution, and one of the most obvious reasons is that driving it underground deprives the government of tax revenues.

New estimates of the scale of female prostitution in London make it possible to guess how much revenue is being lost by the Treasury. If the industry has sales of pounds 200m a year from women working in the capital alone, then adding in male prostitution and the rest of the UK means that nationwide it is probably a pounds 1bn to pounds 1.5bn industry.

Illegality has never stopped the Inland Revenue or Customs and Excise from trying to claim their dues. The well-known entrepreneur Cynthia Payne, for one, can testify to the assiduousness of the tax inspectors. Even so, it is much harder to levy the full whack of taxes on a business that is not 100 per cent above board.

Income and corporation tax, together with VAT on sales and perhaps even a new "sin" tax like the duties on booze and tobacco, would mean an extra pounds 500m a year in revenue from legalised prostitution, even before considering how much business might grow if it could emerge from the shadow of criminality. That would fund a 0.5 per cent pay rise for all public sector workers.

But to focus on the loss of tax revenues is only to peep at the costs of keeping prostitution underground. With the industry's steady shift away from the streets towards premises such as massage parlours, policing costs are not what they once were. Even so, police and court time is tied up in making arrests and imposing fines.

More significant are the costs to society from the links that inevitably develop between prostitution and other crimes. Keeping women and men who sell sex on the wrong side of the law puts them firmly in a world of violence and drugs. Being a cash industry, prostitution is a real attraction to anybody engaged in other illegal activities. Recent research suggests that it has fuelled the growth of the Russian Mafia, and its expansion into drugs.

Licensing brothels would not only cut through this illicit cash nexus, it would also reduce the exposure of both the prostitutes themselves, and the people who happen to live nearby, to other crimes, whether crimes of violence or proximity to illegal drugs. Surveys regularly suggest that fear of crime is a major factor reducing the quality of life in Britain. It imposes a genuine cost in terms of the preventive measures people take - taxis home from the station, burglar alarms - though one that does not show up in conventional indicators of the economy.

The index of "sustainable economic welfare" published by the New Economics Foundation estimates that the cost of crime prevention has been an important factor behind a 20 per cent drop in true well-being since 1980. Anything that trims that cost even a little - or lifts the cloud of fear hanging over people who are afraid to walk their own streets after dark - must be worthwhile.

Even the health service would benefit financially from legalising prostitution. Countries with legal brothels generally insist on regular health checks for their employees, reducing the incidence of sexually transmitted diseases. This is no small matter in the age of Aids. If 80,000 men each week use female prostitutes in London, that means about 300,000 around the country - or, at a cautious estimate, half a million if the clients of male prostitutes are included. They, and their other sexual partners, could be that much better protected from disease if prostitution were decriminalised and licensed.

It is not only the clients who would benefit, of course. For many prostitutes, the job has a lot of pluses. The hours are flexible, the pay can be good if you rise to the top of the profession, and there is no need to pass exams to get a job. Imagine how much better off they would be, though, if their work were entirely above board. They could join Unison, get pension and maternity rights, and take advantage of the EU's directives on pay for part-timers. Paying their national insurance, they would even be entitled to unemployment benefit. They would certainly be less vulnerable to unscrupulous employers. A prostitute could think about taking her boss to an industrial tribunal if he sacked her for getting pregnant.

Legalisation would also, almost certainly, see the sex industry expand. Research into the economics of crime suggests that illegality means a business is smaller and its prices higher than they would be otherwise; the fact that the law frowns on a business allows the people running it to hike up their profit margins. In effect, criminalisation reduces competition and creates the scope for monopoly profits. A comparison of the street price of illegal drugs with the cost to the Colombian or Moroccan peasant of producing them, makes this pretty obvious.

Decriminalising prostitution would therefore reduce the cost of a half- hour session at the expense of the pimps and madams who make exploitative profits at the moment. Those half million punters would not only be happier and healthier; they'd be better off, as well.