Governments depend on sustainable funding sources to support social programmes and public investments.
Compliance with tax laws is crucial to keep the system working for all and support programmes that provide public health, education, infrastructure and other services. Tax morality is the rock base of strategies to achieve the common goal of a prosperous, functional and fair society.
The news that the tax authorities have carried out inspections that resulted in identifying a substantial number of VAT dodgers is good news.
If this reflects a newfound political will to start bringing the shadow economy out into the light, taxpayers will have more reason to feel that the government is indeed respecting their interests.
Malta has one of the largest shadow economies in the EU. Studies by academics from the Johannes Kepler University of Linz, Austria confirm that Malta’s shadow economy accounts for over 25 per cent of GDP, relatively more extensive than that of Italy and Greece.
Admittedly, defining the limits of the shadow economy and measuring its actual extent is debatable even in academic circles. But that figure is backed up anecdotally: we all have experience of how easy it is for some to avoid paying VAT on certain services, or even income tax on their entire income.
When the pandemic struck over two years ago, the government was correct in using taxpayers’ money to support jobs. Some employers, especially in the catering and construction industry who employed causal workers with no national insurance, soon rushed to register these ‘unofficial’ workers to qualify for subsidies linked to the payroll.
The finance ministry needs to come up with some new tactics – whether using the carrot or the stick – to encourage more businesses, employers and workers to show up in the official economy.
According to the European Commission’s latest VAT gap report, Malta lost out on around €164 million worth of revenue in 2019.
Some senior government officials have told Times of Malta that the amount of uncollected VAT could have been as high as €300 million during the pre-COVID years. These are significant figures that imply tax compliance enforcement is still not effective enough.
Strict tax enforcement is an essential tool to enforce fiscal rectitude. Every effort needs to be made to ensure that not only is the income from due tax optimised but that public expenditure is done judiciously and without waste. Unfortunately, in the last few years, we have experienced massive wastage of taxpayers’ money in projects tainted with corruption, management incompetence and inefficiencies.
Households and businesses do care about where their hard-earned tax money ends up going. When wasteful public projects are not addressed with determination, moral hazard sets in as some taxpayers feel morally justified to avoid paying their taxes whenever they can.
The efficiency with which tax revenue is converted into public goods and services is critically important for taxpayers to feel that paying taxes is their social responsibility.
Substantial socio-economic challenges lie ahead for the country. The increase in population in the last decade makes a massive investment in public health, education and infrastructure of fundamental importance.
Raising taxation or increasing debt to fund public projects can only be justified as a last resort. High tax rates, growing national debt and weak tax administration are not the fundamentals of sound economic management.
The failure to improve tax administration and compliance could result in the uneven imposition of tax burdens on honest taxpayers, encourage tax evasion by immoral individuals and burden future generations with unfair debt.