Hidden economy a great outrage

Those who evade tax are literally stealing money from those who pay their fair share, writes Thomas Pippos.

Last Christmas- New Year I wrote about the growing concern around the level of tax paid by multinational corporations; an issue exacerbated by the global reach of businesses and their ability to operate in a virtual world.

And it is a debate that is continuing with the OECD’s Base Erosion and Profit- Shifting ( BEPS) initiative, which is the centre piece of global work on this topic.

But that was Christmas- New Year past and now to a more systemic issue that has existed from the first introduction of tax regimes, the socalled hidden economy.

Also referred to as the ‘‘ shadow economy’’ or ‘‘ black economy’’, it is hard to pinpoint the exact size of economic activity taking place outside of the tax system.

Estimates vary but are anywhere from $ 10 billin to $ 20b, accounting for significant lost tax revenue.

Putting this into context, the amount of lost tax revenue from ‘‘ under the table’’ activity is likely to be roughly the same size as the 2013 government deficit, more than the total proceeds of the asset sales programme to date and significantly more than any revenue that could be generated by a capital gains tax on property.

An extra $ 200 million has been allocated to Inland Revenue, through Budgets 2010 and 2012, to strengthen their compliance activities. Inland Revenue estimates that they are achieving a return of $ 6 for every extra dollar spent.

But this is a mere drop in the bucket compared to the total size of the likely revenue leakage, and begs the question what more can be done and whether, with such a return, considerably more should be spent.

It has been suggested that the ‘‘ cash job’’ is ingrained in the Kiwi culture, but surely that is more something of the past when tax rates were set at prohibitive levels. Right now it is no more than greed that, in the extreme, rips through the fabric of society.

It is so far from the line of acceptable behaviour that it’s not even appropriate to refer to the line.

There is impassioned global debate around how much tax multinationals are paying or whether there should be a capital gains tax on property – in nearly all cases issues that arise from governments having explicitly allowed, and sometimes encouraged, taxpayers to structure their affairs to fall within their ambit.

But the same public interest, let alone venom, is largely absent in respect of the revenue lost through the hidden economy.

Unjustifiably so, given the magnitude involved and the context – an unequivocal total disregard of legal obligations.

This is not about a regulatory arbitrage – using a company and paying tax at 28 per cent or using a trust and paying tax at 33 per cent, for example.

There is no grey area here; those who evade tax are literally stealing money from those who pay their fair share.

Inland Revenue has publicised a number of tax evasion prosecutions, collected tens of millions in additional revenue from hidden economy initiatives, undertaken some targeted education campaigns, experimented with amnesty and has started to publish benchmark data for different industries.

It is difficult to judge whether the message is getting through and the extent to which behaviour has changed.

It is also hard to see how one could ever over invest in this area, or how anyone could complain if it were an area of even more zealous focus, as the gains here could materially shift the dial without impacting those that already pay their share.

This may be worth reflecting on next time someone offers you a discount for transacting under the table.

Thomas Pippos is chief executive of Deloitte New Zealand.