Welfare Cheats Versus Tax Avoiders

 A story on Fairfax’s Stuff NZ website in July 2013, proclaimed that : “more than 3000 alleged welfare cheats receiving a total of $33.7 million a year have been caught in the past six months.”

Shock horror!!  

I came across people who read this as - 3200 benefit cheats scammed the tax payer out of $33.7m.  But, the $33.7m was how much those 3200 people (1948 on unemployment benefit and 559 on sickness benefit) received in benefits - an average of about $10k each - NOT how much they were overpaid.

An article in The Christchurch Press later that year bawled:  "Region's Cheats Scam $1m". 

It stated that 54 people were prosecuted in the 2012-13 financial year for fraudulently claiming a 'whopping $1.3m', which was 'part of the $32m overpaid to welfare cheats nationally'. 

A sidebar detailed six of those 'Welfare Cheats’ - ranging from professional criminals, to two people who had over-claimed an average of $7k a year for 24 years by not revealing they lived together in a marriage-like relationship. 

The article went on to comment on the creation of an offence targeting the partners and spouses of convicted fraudsters. The highly relevant fact that fraudulent claims constitute just 0.15% of the $18bn of income assistance paid annually, was relegated to the penultimate paragraph.  

Roll forward to 2016 and a mother of three was charged with benefit fraud totalling $92k over a period of almost 6 years. The fraud was her failure to declare her partner's income which led to her claiming $15k a year she was not entitled to.  

The Judge informed the woman that he had considered a prison sentence but, as it was her first offence, she had pleaded guilty and had showed the required amount of remorse, he would only impose a sentence of 6 months home detention, plus 100 hours of community work and repayment of $40,000 in weekly instalments of $50 - meaning she will be a debtor for the next 20 years, assuming the MSD do not add interest to that debt. 

There was of course no consideration of the effect of this on her children, on future employment or retraining opportunities, or how it would make her financially dependent on her partner which could cause relationship difficulties.

The emotive language typically used by the media to describe beneficiaries who are charged with fraud cannot be justified either in light of : the claim that a journalist’s job is to just 'report the facts'; the tiny amount of fraud there actually is;  the most common type of fraud, or the way that corporate and personal tax fraud are typically reported.

How many people even know how much detected tax fraud there was last year?  Do we ever see stories headlined ‘Tax cheats scam a whopping $1.2bn"? 

In relation to benefit fraud, there are a few criminals who defraud the public purse by such strategies as creating false identities and claiming from multiple agencies, and there are people who claim benefits while working, or who fail to declare a ‘marriage type’ relationship. 

Some of the latter may be calculated frauds but most are just people who are genuinely struggling to make ends meet. However, they’re all lumped together and labeled as cheats, scammers, scroungers, bludgers and skivers. 

The stereotype of the 'hard-working tax-payer' is set up in opposition to the stereotype of the 'feckless fraudster' who has become acculturated into living out of the public purse.   

Collectively described as a ‘feral underclass' of lazy, feckless, good-for-nothings who waste hard working people’s taxes on junk food, booze, fags and gambling, they are a convenient - and powerless - scapegoat for a society that has lost its social way. 

Among other fabrications, this fails to recognise the simple fact that beneficiaries are also tax payers. 

The sheer absurdity of New Zealand's 'free market' tax system - a complex, costly superstructure that weighs most heavily on the ordinary citizen - is illustrated by the fact that benefits are paid from the state coffers by one arm of the state - the Ministry of Social Development - and taxed by another - the Inland Revenue Department.  How is that anything but a job creation scheme for the Civil Service? 

That taxed income is then taxed further by the imposition of a 15% goods and services tax on EVERYTHING - except rent and gold bullion.  New Zealanders not only pay tax on already taxed income, in light of the fact that such things as central and local government levies and rates are taxed, we pay effectively pay tax on tax. 

The poorest people are the least able to avoid that draconian tax burden.  In truth, they pay a very high proportion of their income in tax.  Very poor people (which the overwhelming majority of beneficiaries are)  will spend ALL of their weekly income so the proportion of that income they pay in tax via GST is far higher than those who have a surplus that they can save.

Many people do not stop to consider how many of the 1 million New Zealanders who receive ‘income assistance’ annually are supernannuants; or how much of that $18bn is paid to superannuants, and that a large amount of that goes directly to the private providers of residential aged care, and is why retirement homes are such an attractive investment option.  

When do we ever see screaming headlines about the owners and investors in the burgeoning aged care sector being parasites on the social body?  On the contrary - we read about how hard it is for them to make a profit (which industry data completely contradicts) and especially so now that they have been forced to increase staff wages.

Where were the shrieks of indignation when it was revealed that William Wales, heir to one of the world’s greatest personal fortunes, was found to be claiming state paternity benefit?  Far from it being seen as inappropriate, the media reported it as entirely proper and further evidence of what a down to earth and ordinary chap he is. It is a wonder the writers of those stories did not suffocate in the clouds of sulphurous sanctimony.

A beneficiary, who is a mother of four, commits a fraud by failing to declare she was in a marriage-type relationship and was jailed for 12 months.  Around the same time a property developer who evaded $1m in tax was punished with a small fine and 12 months home detention.

The courts - the formal ones and the court of public opinion - never stop to consider the fact that a year's home detention in a warm, dry, well equipped, aesthetically pleasing and secure home for someone who has no worries about paying the increased heating bill is a very different sentence from a year's home detention in the typical dwelling of a Kiwi beneficiary - i.e. cold, damp, poorly equipped and expensive to heat. 

There are numerous examples of the different values placed on blue collar and white collar crime and the extremely punitive attitudes towards what is labelled as benefit fraud. 

The sharing of IRD and MSD information makes it more likely that under-reporting of income – ie people receiving more than the permitted $100 a week from paid work - is detected. The other major area of fraud that this sharing of information is intended to show up, is not declaring or under-stating the incomes of people living in the same household.

Given that partners are now also liable to face prosecution, the likelihood is that more poor people will end up in prison – costing the state way more money, directly through the costs of incarceration, and indirectly through the costs of family support.

How would the country react if a similar proposal was made in relation to the partners of tax cheats who will also have benefited from the fraud?

The answer to the question may be found in the fact that in 2012 the Serious Fraud Office announced that, in conjunction with the UK National Fraud Authority, it would complete the first ever 'Cost of Economic Crime Report' in NZ. 

"... in collaboration with the UK National Fraud Authority, the SFO will complete the first-ever the 'Cost of Economic Crime' report. It will be modelled on the UK equivalent, which has become a core source of information for the UK's financial crime strategies in recent years. This report will be linked to a comprehensive analysis of existing resources, agencies, powers and funding currently devoted to economic and financial crime, and the results being achieved. Together they will provide a map of the current fraud landscape and the basis on which government agencies can report back to the Government on future legislative and operational options for fighting economic and financial crime."

But the report did not get to Cabinet and was never released.

The draft report was obtained under the Official Information Act in October 2014 by Radio NZ.  It estimated that the total cost of economic crime was between $6.1bn and $9.4bn or about 4% of the country's GDP.  By far the biggest component of that was an estimated $2 billion a year in tax fraud - compared to $80 million in benefit fraud. 

RNZ said that $2bn is very likely on the light side and other estimates place it at $7bn, and the IRD itself claimed in 2011/2012 that it had detected $1.2 billion in tax evasion. 

The SFO report stated that just over 5% of tax fraud is being detected - compared to over 30% of benefit fraud. Or more accurately perhaps, there is a far greater chance of the MSD reporting and acting upon identified benefit fraud than the IRD identifying, reporting and acting upon tax fraud.

So why was this report never considered by Cabinet; why was RNZ''s exposure of its contents and the spurious nature of the reasons given for it being shelved, not the subject of the same sort of media interest as benefit fraud figures inevitably arouse?

Underpinning the obvious commercial interests is the belief among a large number of  NZers that tax is 'their' money that the government is taking from them - therefore if people try to avoid paying tax that's a legitimate action.  

Beneficiaries on the other hand, take taxes they have not earned so they have no right to that money and taking more than they are entitled to from the state is far worse than shielding your money from the state. 

That is a profoundly asocial attitude and ignores the fact that if we abolished taxation and had a pure 'user pays' system, given the rate and nature of the consumption of goods and services by the affluent and the wealthy, they'd very likely end up paying way more than they currently do in taxation.  

If you are found to have underpaid your tax, unless there is compelling evidence that you submitted a deliberately false claim to get a tax refund or have deliberately under stated your income with the intention of evading tax – you are considered to be a debtor and the IRD will negotiate a repayment schedule with you - which is perfectly fair. 

The same broad principle applies to the MSD except they are much more likely to label over-claiming as fraud and to prosecute – and that is not the only way the two departments treat their clientele differently.

According to a study by Victoria University Associate Professor Lisa Marriott, the notoriously hard-nosed IRD is more likely to write off unpaid tax in the short term than the Ministry of Social Development (MSD) is to let welfare debts slide. The MSD will often keep payment arrears on its books until people retire or die. 

What is not widely known is that the MSD debt includes outstanding loans for essential living expenses that have not been paid back, along with accidental over-payments to beneficiaries – some of which are the department’s fault.

Taxpayers can apply for financial relief from the IRD, but the there’s no similar provision for welfare debtors. The average Kiwi taxpayer was S14,479 in debt to the IRD in 2011/12, while the average indebted welfare beneficiary owed $2,523. Tax debt represented 10 percent of total tax revenue, while welfare debt amounted to 4.1 percent of total social welfare expenditure.

Marriott found that, in the 2011 / 2012, the IRD wrote off nearly 50% of the interest and penalties applied to overdue tax, costing the public purse  $374m.  It waived 11.6% of collectable debt ($435m) while the MSD cancelled just 2.1% of its collectable debt ($8.7m).

And the disparities are widening according to the latest figures released in the course of the inquest into the suicide of a woman who had been threatened with prosecution for benefit fraud. The MSD first downgraded the amount the woman was accused of defrauding from $22k to $5k, then withdrew the allegation completely.

People avoid paying GST, take office supplies, use phones and computers in work time for personal business, do private work in the firm's time, inflate expenses, hide all manner of private expenses in business accounts - and the same people who do that sort of thing are often the loudest in condemning someone on a subsistence income who does a few more hours paid work than they are allowed to before their benefit is cut, or who hides a relationship so their benefit is not cut.

The stereotyping and targeting of the poor and the vulnerable is despicable. It’s a pernicious and destructive form of social bullying.  The ways that government departments and the media behave make it far too easy for some people to let their anger off the leash and put the boot into the poor and marginalised. It takes guts and integrity to challenge the crimes and scams of the rich and powerful. 

Many New Zealanders these days demonstrate way too much bullying and way too little guts and integrity.