Tax professor calls for independent inquiry into how tax evaders and benefit fraudsters are treated by the justice system

Tax professor calls for independent inquiry into how tax evaders and benefit fraudsters are treated by the justice system

By Jenée Tibshraeny

A tax expert is calling for an overhaul of the way we treat white collar criminals compared to benefit fraudsters.

Victoria University of Wellington Associate Professor of Taxation, Lisa Marriott, wants to see an independent inquiry undertaken into our justice system, further to her research highlighting the extent to which tax evaders are largely let off the hook, while benefit fraudsters are chased down and forced to repay every cent they’ve swindled.

She says $1.24 billion of tax was evaded in 2014, while just $33.55 million of welfare payments were defrauded.

Yet for around a third of the level of offending, welfare fraudsters were three times more likely to receive prison sentences than tax evaders.

What’s more, with the Ministry of Social Development (MSD) spending proportionately more recovering benefit debt than the Inland Revenue (IRD) does recovering tax evaded, Marriott says there could be $5 billion to $9 billion of undetected tax being evaded every year.

With this much at stake - without even considering tax ‘avoidance’ - she questions whether we should be putting more resource into recovering these funds.

Having spent three years studying the issue under a Royal Society of New Zealand Marsden Grant, she echoes the Orwellian view that “all people are equal, but some are more equal than others” in our justice system.

Here is a summary of some of Marriott’s findings:

Conclusions drawn from data collected between 2008 and 2014 Tax evasion Benefit fraud
Value of tax evasion/welfare fraud committed in 2014 $1.24b $30.55m
Average portion of income earners/benefit recipients investigated for tax evasion/benefit fraud  0.01% 5%
Average number of prosecutions brought forward in a year 60-80 800-1000
Average value of offending  $229,000 $77,000
Average portion of offenders who received prison sentences 18% 67%
Average amount spent by the IRD/MSD recovering every $100 of tax/welfare debt  $3 $17
Tax/welfare debt written off in the 2011-12 financial year $435m $8.7m

Double standards among different government departments

Speaking to in a Double Shot Interview, Marriott says: “People think the differences come about because the tax evasion is repaid and the welfare fraud is not repaid. In fact it’s completely the other way around.”

Of the 399 tax evasion cases she investigated over a six-year period, only one perpetrator was made to make a full repayment at the time of sentencing.

She admits defrauded welfare funds aren’t always repaid at the time of sentencing, but the MSD is committed to ensuring they are eventually repaid in full.

“The MSD does have a policy where they will attempt to get all that welfare fraud money back from the offenders. Usually most of it is repaid - admittedly over a long period of time - but it is their policy that those funds are collected.”

On the flipside, the IRD’s mandate is to collect the largest amount of tax revenue at the lowest possible cost.

“Prosecuting people is not going to collect much in the way of tax revenue, because only a tiny proportion of those prosecuted cases repay their tax anyway, and of course it’s expensive to take a criminal prosecution.

“So the IRD will do that when they want to make an example of somebody, but it’s not going to help them achieve their objective, which is collecting tax revenue for the government.

“Whereas, if you contrast that with the MSD, there does certainly seem to be a wee bit more willingness to punish people or make an example of people, because of the type of crime that it is.”

Marriott notes that the IRD only spends $3 recovering every $100 of tax debt, while the MSD spends $17 recovering every $100 of welfare debt.

“If they [the IRD] had specific funding, perhaps to investigate more debt and collect more of their debt, then perhaps that might be a good outcome for them.”

Guideline judgements should be introduced

As well as an independent review, Marriott is calling for guideline judgements for financial crimes to be introduced in New Zealand.

This way judges can have guidelines as to what sentences are appropriate for certain levels of offending, enabling them to treat all cases in a similar way.

Being of a financial nature, Marriott says tax evasion and welfare fraud are readily quantifiable.

“There is an absolute dollar amount of the harm that we are talking about.

“So it strikes me that a guideline judgement would be ideal for the types of crimes that we are talking about here. And what that would mean is that any large discrepancies from those guideline judgements would be a bit more transparent.”

She says this would be relevant given the examples we see in the media where there are “suggestions that the outcomes from the justice system have been different because of people’s family or who they are, or what they do for a living”.

Lack of government will to review situation despite public opinion

Asked what the government’s response has been to her findings, Marriott says: “I haven’t had much challenged to the data.

“My overall impression is that people [government authorities] are accepting of the facts as they are, but there isn’t much happening in the way of willingness to review the situation and to think about whether we would like it to be different.”

In fact, Marriott’s request to interview judges in New Zealand as a part of her research, was declined.

Yet a survey she’s undertaken suggests public opinion supports authorities coming down harder on tax evaders.

“People do tend to see tax evasion as worse than welfare fraud, which is a bit of change of thinking in recent times. Historically it has been the other way around.”

Therefore, contrary to what’s expected of it, the justice system isn’t reflecting society’s views.

Lack of robust capital gains tax perpetuating inequality

Marriott says we also have a two-tiered system in the sense that we tax wage/salary earners, not but those who earn income from capital gains made by selling property.

“Given what is happening with our property market - not just in Auckland… - I think it’s a really sensible time to be putting this discussion back on the table, of having a capital gains tax.”

It is worth noting we do currently have some form of capital gains tax in that you will be taxed if you buy a property with the firm intention of resale. However the ambiguity in this rule makes it easy to skirt, as described in this story.  

A bright-line test also took effect in October last year, which means that if you buy and sell a residential property within two years, you'll pay tax on the income you earn from the sale, regardless of your intention at the time of the purchase. The family home is excluded in both instances.

Nonetheless, Marriott says a more robust capital gains tax is an “enormous gap in our tax base”.

“Our philosophy towards tax in New Zealand is broad base, low rate. We have a very broad base with our GST, we have a good base with our income tax, but there is a real gap where we don’t tax capital.

“I think this general idea that the population as whole has no desire for a capital gains tax probably comes from a really significant misunderstanding of what a capital gains tax is and who would be affected by a capital gains tax.”

She points out owner-occupier homes are excluded from capital gains taxes in most countries, with investment properties being the target.

“If we look at Auckland at the moment, people are making significant capital gains on properties, but those gains are not taxed in most cases where people have structured their affairs appropriately, which most of them have…

“Whereas other people who only have gains in the form of traditional income for example - wage and salary earners - they will be taxed from the first dollar they earn.

“So we do end up with this two tiered system whereby people who are wealthy, who are the asset owners, the capital owners, can make gains which are not subject to tax. Whereas people who are the workers, the income earners, they are taxed. So it does strike me as being particularly unfair.”