Wednesday, November 30, 2011

Does tax evasion cost New Zealand?

The Press reports on research by an outfit called the International Tax Justice Network claiming that tax evasion costs the New Zealand Government more than NZ$7 billion a year in lost tax.

Let's be clear, the Government isn't New Zealand and so the loss is not akin to everyone suffering. 

It's a very simplistic view to presume that somehow this is lost sales, stolen money or anything of the sort, or that behaviour wouldn't change if people paid tax on the transactions listed.   Indeed it is quite false.

For a start, some cash jobs simply wouldn't be done if they were subject to tax.  The value generated from it wouldn't happen, and the consumer would spend the money on something else or save it, which may or may not generate tax.   In other words, tax changes behaviour and so the so-called "black" economy would be smaller if it was subject to tax.  That NZ$20 billion "shadow" economy would be less and so there would be less wealth overall.

When PWC tax partner Geof Nightingale says "If we could tax that shadow economy, we would either have more roads or hospitals or get out of deficit faster" he's quite wrong. For a start, he presumes the shadow economy wouldn't shrink significantly if it was taxed.
Secondly, it is a bold assumption to presume government would spend the money better than the people trading the goods and services.  Even if you go beyond unlimited free air travel for MPs into buying up an unprofitable railway, funding radio stations you don't listen to, paying welfare benefits to convicted murderers and subsidising businesses, government spending is far from frugal or careful enough to presume that people are not better off because they are paying less tax.  Certainly if the businessmen doing cash jobs buys things from my shop (even if I pay tax), I am better off, as are the businesses who sold me those goods, and the employees of those businesses and so on.   How does Nightingale know what is best for them? That sets aside the detail that roads are paid for by what are effectively user charges on motorists (try getting out of paying fuel tax, although RUC is easier to evade).   He could have said more cultural advisors, more planners, more policy wonks, more NZ On Air funded TV programmes, more overseas travel for bureaucrats and politicians, more assistance for hand-picked businesses, more welfare benefits so people subscribe to Sky TV more.   Why is that good?

Yet he then says "We anecdotally hear there's quite a lot of cash business going on in Christchurch these days".  You don't say?  So after the government basically told businesses down town "it's not your property now, you can't go near it" and "oops we demolished your building, forget to tell you or ask you", do you really think people in Christchurch have respect for paying taxes whilst they engage in voluntary productive exchange of goods and services?  Leave these people alone, they haven't hurt you and they are trying to rebuild their lives and businesses, businesses that create wealth, not take wealth.

In a low tax, small government New Zealand, Geof Nightingale may have to get another job, for at the most, taxation would be very low, very simple and as such few would seek to evade it, because it wouldn't be confiscating a sizeable part of your income.  It wouldn't be worth it for most businesses to bother hiring the likes of him.

Finally, it's important to point out to the IRD spokesman who said "our hidden economy and property transaction areas were showing a return on investment of $5.70 for every dollar invested" that this isn't an economic return.  It is just that for every dollar spent on a tax snoop (consider the psychology behind someone who chooses to spy on productive peaceful people to find out if they are coughing up "their share" to the state) the snoops recover $5.70 from the people they catch - catch not actually initially force or fraud on anyone, except of course defrauding the state - a state that will happily take taxes all its life from people and if you die before the age of national superannuation, not give your estate anything for your troubles.  A state that will promise one thing, and then deliver something else.  A state which when it fails to answer your 111 call, or fails to investigate the crime you're a victim of, or fails to get you healthcare when you need it, isn't accountable and wont pay you a refund. 

No.  Every dollar IRD takes is a dollar that otherwise would have been spent on a good or service someone wanted, or invested to make more dollars, or donated to help someone or something as a charity.  Because fundamentally, the difference between the money received by those in the cash economy and the money received by the state, is that in the former case, the person getting paid ASKED and couldn't use violence to demand anyone pay for whatever goods or services he offered.

When the state is small, and tax is low, the size of the so-called "black" economy shrinks (excluding the other "black" economy of banned goods or services) as evasion isn't worth it, simply because people have more of their own money.  That money isn't a loss to New Zealand, because it is part of GDP and because it circulates between consenting adults trading value freely.  The only concern comes from the government bemoaning that it hasn't got its slice of a cake that it had little to do with baking in the first place.

1 comment:

DianeT said...

With the current set-up, the Govt. is getting 15% tax from the cash economy through GST.
I'd be damn happy to be getting 15% return on my 'cash-in-the-bank' at the moment.