Editorial: Challenges of tax collection

Why do we have to pay taxes? The simple answer is that, until someone comes up with a better idea, taxation is the only practical means of raising the revenue to finance government spending on the goods and services that most of us demand.

Finance Minister Clyde Caruana in parliament warned tax evaders that the government “will come down on you like a ton of bricks”. The government introduced a new law that imposes new penalties on tax evaders, while allowing them to avoid court proceedings.

This new law is a positive development in the fight against tax evasion, which, according to Caruana, is practised by 80 per cent of taxpayers. The introduction of modern IT has undoubtedly helped.

The move to avoid overcrowding the judicial system by allowing tax evaders to settle out of court, while still facing substantial penalties, is both a practical and fair solution. This bill ensures that those who fall behind on their payments are not only incentivised to come forward but are also deterred from further evasion.

Still, the tax authorities must acknowledge that the key challenge for an effective tax collection system revolves around one pivotal variable – the lack of tax education. It is this that leads to poor taxpayers’ perception of the relevance of tax payment, the taxpayers’ culture to evade and avoid taxes and social disapproval among most taxpayers against tax offences.

This explains the necessity to develop tax education policies, diversify the sources of taxation and strengthen the political will to make tax regulations enforcement consistent and fair.  

Tax policy is often the art of the possible rather than the pursuit of the optimal. This needs to change.

The country faces formidable challenges as a result of an economic model that encourages labour-intensive business activities with little added value, which are creating demographic pressures and straining the physical infrastructure.

Demand for public expenditure continues to increase to support investment in public infrastructure and for social support. Malta’s tax burden (the total tax revenue, direct and indirect, as a percentage of GDP) is among the lowest in the EU.

It is almost inevitable that, even with improvements in reducing the gap between the tax the treasury collects and the amount it thinks theoretically ought to be paid, it will prove challenging to deliver the public investment the country needs.

Governments often take the path of least resistance, developing tax systems that allow them to exploit whatever options are available rather than establishing rational, modern and efficient tax systems. Malta’s informal economy is challenging to measure but some international empirical research suggests that it is one of the largest in Europe.

So, the tax authorities have difficulty in generating reliable statistics. This lack of data prevents policymakers from assessing the potential impact of significant changes to the tax system. As a result, marginal tactical changes are often preferred over structural changes, even when the latter are preferable. This is perpetuating inefficient tax structures.

Income and wealth gaps between sectors of the community are getting wider. Raising high tax revenues in this situation ideally calls for the rich to be taxed more heavily than the less affluent.

The economic and political power of wealthy taxpayers often allows them to prevent fiscal reforms that would increase their tax obligations. This explains in part why our tax authorities have not fully exploited personal income and property taxes to achieve progressivity, where the rich pay proportionally more taxes.

Caruana promised not to introduce new taxes in the next budget. This may sound popular and understandable as the next general election is fast approaching. Still, it fails to acknowledge the need for fiscal reform to address the country’s long-unaddressed socio-economic challenges.