A Taxing Problem

It's Not Your Money, Its Ours

The "underground" economy has been around a long, long time.  It's probably the oldest economic system in the world.  It is the in-kind commercial exchange system--the "I will fix your leaky spouting if you repair my car" economy.  No money exchanging hands.  No bank accounts.  No tax (except GST, of course, if you have to purchase parts and materials).

This in-kind system, however, is very, very inefficient.  Money is required to make the exchanges easy, efficient, and equitable.  But the underground economy has a monetized solution.  Pay cash.  The benefit--no tax.  And that is the biggie. 

Yesterday The Dominion Post reported that the "shadow economy" is costing the Government more than $7 billion a year in lost tax. The figure equates to 44 per cent of New Zealand's health budget. An international survey estimated that New Zealand's shadow economy was worth more than $20 billion, making up 12.4 per cent of gross domestic product.

Now, we have no way of knowing just how credible those estimates are.  But they have to be pretty credible to work out that it is 12.4 percent of the economy that is underground.  After all, the 12.4 percent gives a scintilla of scientific rigour, non?  But, let's just round it down to a good old ten percent.  It is still a significant number.  And that does not surprise us at all.

Times are tough.  Business compliance costs for one or, two, or three man businesses are through the roof.  Faced with a choice of a cash job or an above-ground transaction, which would you prefer?  The cash job every time.  No GST return, no tax, no form filling, no paperwork--just cold hard cash in the pocket.  And virtually untraceable, provided no-one whistle blows.  And since everyone has skin in the game, there are very, very few whistle blowers.  Moreover, the costs of tax recovery are much much greater than the amounts to be got.   Even the IRD is forced to turn the Nelsonian eye to the problem.  So, it's a no-brainer.

Enter Kevin Milne, a man who lives and breathes in a room of high moral dudgeon.  Spluttering into his morning coffee, Milne expostulates that people working in the cash economy have committed the ultimate act of national betrayal, of sedition, and of blasphemy.  Their crime:

The biggest contributor to the shadow economy is thought to be tradespeople doing work in return for cash, a practice overdue for change, according to Milne. "This is something that's been around New Zealand for many, many decades.

"I have indulged in it, like every other Kiwi. I make no excuses for that ... it's not until you're confronted by the figures ... that you realise you've just got to stop doing that. "What they're doing really is forcing the Government (sic) to make cuts in areas that are vital to us." People who offered cash jobs seemed to have a mentality of "keeping the Government (sic) out of it".

Keeping the government out of it. Yup.  You hit the nail on the head right there, Kevin.  How astute.  Then comes the two-liner to beat all:

"It's them saying, `Let's stop them from getting their hands on our money'. Well, it's just so stupid – it's not their money, it's the country's money. I think it's corrupt, I think it's irresponsible."

It's not their money.  It's the country's money.  There, he came out and said it.  Scratch a bleeding heart liberal, and underneath you will find deeply crimson socialist blood.  The first and ultimate owner of everything is "society"--that's socialism in a nutshell.  Or to put it less more delicately: "It's not their money, it's our money."  Or, less delicately still: "It's not their money, it's my money."

There are two effective ways to combat this problem of the Underground Economy, without resorting either to socialism or libertarianism for one's warrant.  The first is simply pragmatic.  Reduce tax rates and simplify compliance costs and the Underground economy shrinks.  It has been demonstrated repeatedly.  Flat taxes are the most simple and easily understandable.  Reducing using employer and business people as unpaid revenue collectors for the government, operating increasingly complex regimes and facilities on behalf of the IRD would also help a great deal.

Secondly, were the government to cut its spending relentlessly on frivolities and luxuries and fripperies its moral standing would rise.  Every time the police turn up to nab the crim, the public gets an object lesson in why civil government is a necessary good.  But when the state spends taxpayer money on the domestic purposes benefit, its moral legitimacy reduces.  The intrusive, do-good, soft-despotic state ultimately lacks legitimacy in the eyes of its own citizens.  They will take every opportunity to participate in the Underground Economy.

Restrict the government to the essential responsibilities delegated to it by the King of all kings, and reduce and simplify the tax system.  These two fronts would win the "war" on the Underground Economy.  But, unless you are prepared to do that, Kevin we fear you had better come to terms with the beast, because it's only going to get bigger and stronger. 

We recall that in the final decades of the Soviet Union, it was only the black market which enabled people to survive.  Couldn't happen here?  Really. 

Hat Tip: Andrei: NZ Conservative