by News WeeklyNews Weekly
Editorial: Will GST cut the black economy?
, August 12, 2000
— Peter Westmore is National President of the National Civic Council
In introducing the GST, Mr Costello used Treasury estimates that the GST would recover $3.5 billion over three years from people or businesses avoiding payment of tax. Last March, he said, “This tax cracks down on the black economy and that’s the whole idea of it.” In an article in Melbourne’s Sunday Herald Sun on July 9, he said, “The losers [under the new tax system] are tax cheats, who are now finally paying their way.”
The Small Business Minister, Mr Reith was even more gung-ho. In a TV interview on June 18, he predicted that the Government would recover $7 billion in unpaid taxes — though conveniently forgetting to mention that the extension of the tax system to services (such as restaurant meals, plumbers’ and electricians’ bills, etc.) will inevitably widen the tax net substantially, and increase the Government’s take.
The introduction of the GST passed with very few instances of profiteering by retailers, possibly due to the threats of punitive legal action by the Australian Competition and Consumer Commission. One result of this was that most consumers either put forward purchases ahead of the July 1 deadline, or alternatively, held off purchases until the new tax system had been bedded down.
Despite the alleged simplicity of the new tax system, the Australian Tax Office has issued some 12,500 “private rulings” on the GST, because of business confusion over fundamental aspects of the new tax system.
Two months ago, an Associate Professor of Law at the University of Sydney, Cynthia Coleman, told the Financial Review, “A lot of tax has grey areas and business is entitled to the security of private rulings; but the fact there are so many, and the GST hasn’t started yet, is an indicated that the system is perhaps not as simple as we were led to believe.” (AFR, May 23, 2000) Other countries which have had GSTs for years have found that these have had little or no effect on the “black economy”.
A New Zealand accountant, Leon Hendren, recently published a book, Survive the GST, in which he wrote, “GST is an easy tax to avoid, evade or defraud. The ATO [Australian Tax Office] will be handing out refund cheques like it is Santa Claus.”
Last November, the Blair Labour Government in Britain, which has had a GST (called the Value Added Tax) for many years, commissioned Lord Grabiner to conduct an investigation of the informal economy, to move economic activity from illegitimate to legitimate businesses, and recommend a plan of action.
The “black economy” in Britain has been estimated to constitute around 13 per cent of the country’s GDP.
In March this year, he delivered his report, The Informal Economy, which said, “Every year billions of pounds are lost to the informal, or hidden economy. People conceal their income or the record of what they have sold in order to evade income tax and VAT.” He added, “Others defraud the social security system by claiming benefit for being unemployed when they are in work. Many employers are committing or colluding in a range of different offences at the same time. Honest taxpayers have to pick up the bill.”
Lord Grabiner was unable to document the size of the problem. However, he said: “By its nature, the size of the informal economy is hard to measure. Most estimates are based on analysing high-level economic aggregates, such as labour market statistics or income and expenditure surveys, and calculate the result as a percentage of GDP ... It would be impractical to arrive at a precise and meaningful figure as to the scale of the problem without a considerable investment of time and resources. For the purposes of this report, I have assumed that the hidden economy is a major problem, involving billions of pounds, and, in view of what I have learned in conducting this review, I am quite sure this assumption is a reasonable one.
“Similarly, the number of tax-evaders is not known. A random investigation of Inland Revenue self-assessment tax returns might estimate how many registered tax payers under-declare their income; it could not measure those who are not registered at all. The scale of benefit fraud is probably easier to gauge. Samples of claims investigated by the Benefits Agency suggest that, at any one time, 120,000 people are fraudulently working and claiming ... means-tested benefits estimated at over £450 million [$1.1 billion] a year.”
The seriousness of the problem was emphasised by his statement that “once people in the hidden economy have been caught, there is scope to give the Government more ways to deal with them.”
An Australian expert in the “black economy”, Dr Christopher Bajada, Economics Lecturer at the University of Technology, Sydney, last year produced a report, Underground Economy in Australia, which estimated that the size of the black economy in Australia was 15 per cent of GDP, a figure several times higher than the Treasury estimates.
He suggested that most of the areas of tax evasion — from criminal activity such as prostitution and drug dealing, moonlighting, welfare fraud, failure to declare interest payments, transfer pricing arrangements within corporations and barter — are outside the scope of the new tax system, which is designed to address business-to-business avoidance.
These will continue to flourish — despite (or because) of the GST.