Most taxpayers comply with their tax obligations, while some are determined not to. The practices of tax evasion, tax fraud and failure to pay tax dues on time are widespread. Not only are they illegal and rob the government of revenue, they also create distortions in the allocation of resources and widen inequalities.
The Minister of Finance, Clyde Caruana, has taken a clear stand against the culture that shuns fiscal rectitude. He was speaking in parliament last Monday during a debate on a motion moved by the opposition calling for the repeal of a legal notice issued in November that allows companies to sell off property to settle their taxes.
Caruana noted that the government was owed €5 billion in tax arrears. “The government is not an overdraft facility,” he said, going on to warn businesses that “from now on, taxes due have to be paid promptly. Secondly, attempts will be made to collect what was due in the past.”
If the minister has a concrete plan in mind to carry through these laudable intentions, then he deserves the support of the whole community, which relies on free public services to thrive. However, every finance minister invariably preaches the importance of fiscal transparency. Unfortunately, the steps that need to be taken to hardwire rectitude into the collective mindset are obstructed by many stumbling blocks.
Tax evasion, fraud and non-compliance must be tackled through major sustained efforts to strengthen tax administration. Particular emphasis would need to be placed on enforcement to ensure that those who function in the informal economy are brought into the tax net.
The IMF calculates that, in 2017, Malta had one of the biggest relative black economies in Europe, at almost 24 per cent of GDP. This is even bigger than the estimated black economies of Italy and Greece.
The black economy is fuelled not just by low-skilled work taking place off the books, with neither employee nor employer paying national insurance and income tax. Under-reporting income, over-reporting of deductions through false invoicing, undocumented selling of goods and services and importation of goods that do not pass through customs are other enablers of a vibrant black economy.
Caruana now needs to be consistent in his declaration of wanting to promote a tax compliance culture by making it harder for people to evade the rules.
The case for fiscal transparency rests on the fundamental principles of public finance: stability, efficiency and fairness. Caruana must not be intimidated by the political risks that his government will incur by the promotion of fiscal integrity, especially in the run-up to an election.
The road that leads to fiscal rectitude is an arduous one but the country badly needs to embark on it. The context is the years of abuse of power and of taxpayers’ money by certain government politicians and public officials.
This has led not just to severe reputational damage being caused to the country but to many business owners taking advantage of what they perceive as increased laxity in respect of the rules.
It will not be easy for Caruana to kill the culture that was once so well defined by former Italian prime minister Silvio Berlusconi, when he argued that high tax rates make evasion a “natural right” for many. But there is no place anymore for non-transparent tax concessions, quasi-fiscal subsidies, off-budget spending and a lax attitude to tax collection.
Caruana has read the Riot Act to tax evaders and defaulters. More power to him. We hope that he means business… and that businesses will heed his warnings.