Ensuring social justice

Mahatma Gandhi used to say “To believe in something and not to live it, is dishonest” What is it that we believe in when discussing the delicate subject of fiscal morality? We believe in upholding the basic premises of every civilization, that of social justice. We believe that while people have a legal and moral obligation to pay their taxes, the Government has the political responsibility to spend every Euro of the people’s money wisely and cautiously.

It does not take much effort to come to an apprehension of the chaos created through the collapse of morality and ethical business practices, and a lack of Governments’ judicious expenditure of public funds. Take a look around at the international political and economic scenario. The debt crisis in Greece and other troubled nations has burdened the IMF and the EU with bail out funds. Dozens of nations are sacrificing a portion of their sovereignty to those controlling the purse strings. They are at the mercy of those who can bail them out. Indeed, this is not to say that morality solves every economic crisis we face, for, some financial disasters simply happen and are not easy to predict. But others are self-inflicted through the exposure of the financial system to major risks, sometimes pre-meditated, sometimes in ruthless manners for some political advantage or self-interest. Surely, however, a strong moral fibre would prevent many of our nation’s economic disasters.

The Irish experience

Like many economies, Ireland banked its prosperity on a real estate boom. Much of its growth was built around the property market, but since 2008 this has suffered a dramatic collapse. House values have fallen more than 50% and bad debts – mainly in the form of loans to developers – escalated alarmingly in the country’s main banks. This almost wrecked the financial institutions, leaving them bailing out by the government at a cost of over forty billion euros. As a consequence a huge hole in the Irish government’s finances was opened, seeing its budget run at a huge deficit.

As the government stepped in to save the banks most of their massive debt is now actually government debt. Since the great majority of this debt is owned by foreign lenders which the Irish Government cannot default on, there was no option left but to negotiate a huge bail-out package with the IMF and the EU exceeding eight-five billion Euro.

But shifting the bad debt around does not get rid of it. The end effect of the bail-out was a 4 year austerity plan involving deep cuts in spending and public sector jobs, a lower minimum wage and higher taxes. The losers in the end are the Irish tax-payer and the Irish economy. It is not surprising that at the end of it all, the people take to the streets since they refuse to accept this new burdensome status quo. – having to bear the cost of perhaps ruthless mismanagement by highly paid elites through uncalculated risks.

Who is to blame? The blame game is endless. What is the root and cause of this financial crisis? Banks, part-nationalized, blame Government policy, Government blames banks for their unscrupulous and irresponsible lending; home owners blame the lenders and lenders blame home owners for defaulting payments. At the end of it all, the cost of a mix age of bad decision making, irresponsibility and lack of accountability, lack of proper risk-management analysis, have to be met by punishing hard-working, prudent taxpayers. This certainly runs contrary to the moral core.

One worry has been that Europe’s debt problem could spread further- that the crisis scenario faced already by Greece and Ireland and other nations would be repeated by others struggling economies such as Portugal and Spain.

Culprits of the Tax Regime

Despite a marked improvement in the local tax regime, both as regards legislation and more so as regards enforcement, the general perception that tax evasion is rampant still persists. Identification of the culprits to the tax regime may seem an easy task, but there is more to it than labeling a few individuals.

Tax evasion seems to be linked mainly to the self-employed sector. The Chamber of Commerce has indicated over the past years that the root of such invasion does not lie within the category of full-time businessmen or companies but rather tax evasion lies with part-time tradesmen and individuals in the service sector who keep no formal set of business records, who do not operate from permanent premises and who rely on word of mouth to promote their operations. These culprits somehow manage to escape the tax net operating in the underground economy, which therefore, not only fail to make the necessary fiscal contributions but simultaneously serve to significantly distort competition to the detriment of lawful competitors.

Economists argue that unless tax evasion is clamped down, this will only push the government to introduce additional fiscal measures. On the other hand, over-zealous enforcement measures may easily push certain economic activities further underground, beyond the reach of the tax authorities. Whilst it is practically impossible to completely eradicate tax evasion, if the size of the hidden economy reaches certain proportions in a way that it encourages widespread tax evasion, this can only lead to a moral collapse of the tax system.

Government is duty bound to see the tax burden is equitably spread on as wide a base as possible. More than this, the system has to be efficient in a way that the tax law is enforceable and that all tax due is collected. Experience seems to show that the bigger proportion of tax collected is paid by people in the middle-income group, whereas the smaller proportion is paid by people in the higher income group. Wage earners are normally the victims of this situation because they operate from a captive position when compared to self-employed individuals. Does it reflect fiscal morality when a large number of well- developed businesses still make understated declarations of their annual turnover and declare profits which are marginally above those declared by middle to lower -class employees?

It is estimated that the tax complaint rate in Malta averages to 70%. The defaulters run into millions of euro in lost revenues for the government every year. Reducing tax evasion is both an economic and political priority. It would certainly serve to bring more social justice by providing more for the working class and easing the tax burden on the middle class.

The Tax Compliance Unit must target those who are submitting ridiculous declarations. The use of sect oral benchmarks is the fairest method to deal with shameful abusers who add insult to injury by claiming social security benefits. Fraudulent claims of social security benefits also act as a disincentive towards inducing more fiscal morality. Rampant tax evasion stifles competition by allowing certain operators to price out competitors by not charging VAT and by not having to shoulder a reasonable income tax burden. There can be no level playing field in business when a minority competes on tax declarations.

Enforcement on underground operators is moreover complicated by the fact that the VAT Department might have little or no record of such unregistered persons and where they operate. However, this should certainly not discourage the department form pursuing further along this line. There is no room any longer for heavy tax defaulters who declare a petite income and then run the most expensive SUV’s.

Judicious expenditure of public funds

But then there are two sides of the fiscal morality coin. Fiscal morality also entails judicious expenditure of public funds. This does not only extend to waging a war on wastage and exercising strict control on all cost centers within the various ministries and public entities. It goes far beyond this point.

Judicious expenditure first and foremost requires a process of discernment. As within any family structure, it is a matter of managing income responsibly, prudently and without ignoring the fact that we cannot always have it all. Discernment is a process conducive to taking the right decisions. Discernment is a process that does not evaluate simply on economic principals as the principal criteria, but on moral and social considerations.

Likewise the Government has the legal and moral responsibility to discern where to put the people’s taxes. Likewise it has the responsibility to ensure that its institutions are run by the necessary adequate expertise in the relative fields. It hurts to see political appointments on Government boards and entities sometimes leading to grave and unacceptable mistakes which costs have to be borne by the taxpayer. It hurts when government projects result in unacceptable cost over-runs due to lack of adequate planning. It hurts when heavy costs on road maintenance go down the drain due to unplanned re-construction works a few days later. Government must ensure full value for money in public expenditure, and is duty bound to see that the beneficiaries of Government programmes such as social security, national health, education and housing are themselves bound by fiscal morality. A strong monitoring and enforcement unit is a must to oversee entitlements paid vis-a- vis continued eligibility of beneficiaries and collection of overpayments.

In this respect, the Chamber of Commerce has long been insisting with the government to change the system of subsidies and social services provided by the state with an accent on giving all that is required to those who are genuinely in need rather that awarding some who do not need any assistance at all. This is social justice and what fiscal morality is all about. Although it would prove unpleasant on the image of any political party to trim existing social benefits, it would be more chaotic should our island in the sun be forced to take drastic survival measures and bail-out calls similar to our neighboring countries. Times change and social services dished out perhaps too extravagantly in the good old days carry no life-time guarantee that they will remain sustainable.

What is really at the root of the budget fiscal and economic black hole? Is it a budget problem, or a personality problem? It is so easy for politicians to slip into decisions which may not necessarily reflect an investment in the common good, but rather decisions which are triggered by partisan agenda, perhaps even out of a subtle pride or even worse to defy the opponent party. Fiscal morality rises above this childish behavior and sees to it that the any elected party has the legal and moral responsibility to guard the public purse with extreme responsibility and caution.

We all know the serious consequences, for instance, of the influx of substantial employment into our public entities and corporations prior to the general elections. Malta’s two-party political system, with such a tiny margin of eligible votes between the two, will do anything to refrain, especially as the election draws near, from stepping on the toes of any particular sector.

Re-gaining equilibrium

Is there a need or some subtle scope to separate economic issues from social issues? Fiscal problems are social problems. Society is intrinsically connected with fiscal problems and cannot be separated. The government exists for the benefit of society and not the other way round.

If we fail to merge fiscal and economic measures with sound and tested principles based on social justice and fiscal morality, we can only reap the costly consequences of our own actions. Fiscal irresponsibility, mismanagement and lack of adequate enforcement structures to curb the culprits of the tax regime can only lead to a breakdown of our social structure. A weak social structure can only lead to increased poverty and crime, underground operations, broken families and mutual disrespect. If we do not respect the value of the individual whether in the womb or in the classroom or in the living room, if we devalue the intangible qualities of life, it can only get more expensive in the long run. Lack of a pro-active stance to educate and prevent family breakdowns, for instance, perhaps due to finance restrictions for such essential projects, can only result in added social problems with an increased costs in social services at a later stage. It is enough to consider the huge amount of money being dished out of the tax payers’ money to service social cases as single mothers, drug rehabilitation and a steady inflow in our corrective facilities.

Tax payers rely on trust. Naturally there is resistance by taxpayers to take hits on what they believe are benefits for which they’ve paid taxes. If the top people in charge fail to deliver and disregard fiscal morality as if it were an alien to the fiscal and economic formula, then this could only lead to social instability. The repeated cases of mismanagement verging on corruption in the Local Councils sector, for instance, gave much room for thought to the honest taxpayer. Why do we elect people in office that directly or indirectly dilute our standards and way of life through their mismanagement of public funds?

The collapse of morality and ethical business practices can only result in the collapse of the fiscal and economic system. Whether it is the Bank of America, General Motors, General Electric, or Citicorp, these are enormous business that made irresponsible decisions with a mix age of mismanagement such as too much leverage and misleading accounting leading to chaotic situations with ripple effects on major sectors of society.

In society there is much more than a balanced budget. We must protect the lives of unborn children, we must protect kids from dysfunctional families, we must strengthen the family, we must protect our borders, and we must protect those sacred principles on which this island was founded. And yes, we must protect our economy too!

Fiscal instruments must be designed within a moral framework. Fiscal policies have to reflect a sense of community. Wealth, when created solely by unfettered economic expansion and fueled by over – consumption, does not produce happiness. A laissez faire economic expansion threatens the very viability of the economy that causes it. Just take a look at the serious abuse of the world’s environment throughout history, leading to serious global climate and other environment changes which compel us to take costly remedy measures to try to fix what we have deliberately damaged.

The gap that seems to prevail between the economic sphere and social sphere has to be bridged. This gap is dangerous because it would not be ethically accepted that an economic action did not include in itself the social dimension, just as a merely redistributive social sector would not be sustainable in the long term if it did not make its calculations according to the resources – before being able to distribute, what in fact is necessary to produce.

Fiscal morality is about social justice and as sense of fraternity. It is about making a diligent use of our resources for a common good.

(THIS ARTICLE WAS PUBLISHED IN ‘THE ACCOUNTANT’ IN APRIL 2011- AUTHOR GORDON P VASSALLO)