Editorial: Black economy isn't a fair go for taxpayers

Cash jobs don't just evade GST but payment of the 28% company tax too. Photo / Glenn Jeffrey

Accepting offers of under-the-table work is well ingrained in the national psyche. Many New Zealanders are quite happy to become part of the black economy when they are quoted two prices by a tradesman - one that pays heed to the taxman and one that does not. Some even demand a tax-dodging deal. All sorts of justifications are offered for yielding to this temptation, but rarely is the ultimate cost of the practice to the community acknowledged. And only rarely does someone have the courage to speak out against it.

The latest to do so and seek an end to "cash only" unrecorded payments is former Fair Go presenter Kevin Milne. "I've struck this quite often myself - [the tradesman says] if you want to just pay cash, you can take 15 per cent off, and it's very obvious what's going on there, and we just live with it," he says. What is actually going on is that the tradesman is evading not only 15 per cent GST for labour but the payment of 28 per cent company tax. The upshot is a black economy that is difficult to quantify but undoubtedly substantial.

Given the extent of the practice, it might be expected the Inland Revenue Department would make recovering this unpaid tax a high priority. Its determination could be expected to double during economic downturns when cuts are having to be made in government spending. But only spasmodic attempts have been made to tackle the problem.

One more was announced in the last Budget when Inland Revenue was given an extra $120 million to stop the exploitation of loopholes and practices that involve tax evasion or avoidance. The black economy was one of the areas singled out for attention under this "tax integrity" package because it is assumed the increase in GST to 15 per cent will raise the temptation for cash jobs.

The Revenue Minister estimates that a sharper focus by Inland Revenue on tradesmen and small businesses will recover $750 million over the next four years. Peter Dunne acknowledges, however, that this is "probably only a proportion of what's out there". That points both to the size of the problem and the difficulty of reining it in. Increased targeting will reap some dividends if done properly, as was the case with the recovery of unpaid traffic fines. Ultimately, however, the solution lies in changing the public mindset.

Milne believes this could be done relatively quickly. A public education campaign that urged people to say "we no longer find this acceptable" would make it difficult for tradesmen to continue the practice. The model for this, he says, should be the action taken against drink-driving. At the heart of such a campaign would have to be a clear message from Inland Revenue that it means business. The vigorous enforcement of the tax laws was the main reason for Americans once having probably the most respectful attitude to the collection of taxes in the world.

However, the campaign would have to involve equal measures of stick and carrot. As much as there should be special taskforces targeting the practice, there should also be amnesties and suchlike. Additionally, there must be a concerted effort to ensure that those who aid and abet tradesmen to dodge taxes feel a sense of guilt. The way to achieve this is by graphically illustrating how cheating Inland Revenue means the rest of the community pay extra taxes, not least the honest citizens who refuse to have anything to do with cash-only jobs.

Tradesmen are invariably the winners in these transactions. Usually, their customers settle for a 15 per cent discount. They are losers as much as the wider community. Milne is right. It is time to stop those who are rorting the tax system. This can be achieved if people simply refuse all offers of under-the-table work.