Black economy thrives in a maze of red tape

Judith Sloan
AFR

Not so long ago, Kelly O’Dwyer would have been called the assistant treasurer. These days she goes by the title Minister for Revenue and Financial Services.

The title assistant treasurer was a prestigious one and those who held it often went on to higher office. Mind you, it was not a cabinet post.

Having said this, O’Dwyer’s title is more accurate in the sense that her role is mainly about raising more revenue, arguably for the government to waste, and to slug the financial services industry with a slew of new regulations and imposts.

When it comes to raising more revenue, the so-called black economy has been a perennial favourite of governments. There have been numerous reports in the past that generally came to nothing. But following the Einstein principle, O’Dwyer at budget time commissioned yet another review into the black economy.

She even announced an immediate down payment of $632 million across the forward estimates before the taskforce undertaking the review had even started. We, of course, know that these sorts of figures are essentially made up to bolster the budget bottom line. Expect another whopping figure at the time of the mid-year economic and fiscal outlook later in the year.

So what is the black economy? According to Treasury: “The black economy refers to people entirely outside the tax and regulatory system or who are known to the authorities but do not correctly report their tax obligations.”

A range — actually a dog’s breakfast — of practices is listed as part of the black economy: understatement of takings; payment and acceptance of cash wages; welfare fraud; the sharing economy; phoenixing of companies; illegal tobacco; and money laundering.

The fact these activities can all be lumped together as having much in common strikes at the heart of the weakness of the black economy review in the first place.

Some of these activities are clearly illegal and need to be controlled by law enforcement agencies. Others arise because of the excessive regulatory and taxation burden imposed on businesses and individuals that gives rise to incentives to escape the clutches of the formal system.

Still others arise from the system of overseas student visas in which work rights are restricted and employers of the same ethnicity sometimes will exploit the workers’ circumstances to underpay wages, often in cash. In the worst case, individuals on student visas stay in Australia not for the purpose of undertaking study but to game regulatory and tax arrangements, often for the benefit of a third party.

The point here is that there can be no one-size-fits-all solution to the black economy as its manifestations are extremely diverse and differentially amenable to government rectification.

There is also a real danger that by imposing even more regulations to suppress the black economy the government may make the problems worse.

Looking at the interim report, there does seem to be an element of a solution in search of a problem. In 2007, cash accounted for about 70 per cent of all consumer payments; the figure is now 40 per cent. You only have to witness the ubiquity of payWave to understand this trend.

While it is true that there is a surprisingly large proportion of high denomination notes in circulation, there is evidence that older folk and certain ethnic groups disproportionately hold $50 and $100 bills. Moreover, cash is growing at 4 per cent a year, which is lower than the rate of growth of nominal gross domestic product.

The Treasury estimates that the size of the black economy was 1.5 per cent of GDP in 2012, up from 1.3 per cent in 2001.

But these figures are extremely rubbery. Recall that government accounts for more than 30 per cent of GDP. And by international standards the size of the black economy in Australia appears low — one-third of the average.

There is also a common perception that self-employment has become more common, driving a higher incidence of tax minimisation. But according to the figures collected by the Australian Bureau of Statistics, the proportion of all employed people who are self-employed has fallen from 20 per cent in 2000 to 17 per cent on most recent figures. The decline in the number of independent contractors is consistent with this trend.

To be sure, predictions of the Independent Contractors of Australia point to a huge increase in their numbers in the future but no reliance should be placed on these figures.

Indeed, the fastest growing sector in terms of employment is health and social assistance, where the vast majority of workers are employees paying pay-as-you-earn tax.

In keeping with the dog’s breakfast of black economy activities identified in the interim report, a dog’s breakfast of recommendations is outlined. Some of the ideas are sensible but many are simply laughable.

There is a view that the complexity of industrial awards drives some frustrated employers into simplified cash payments for their workers. But pigs are likelier to fly than any substantial simplification of these awards be implemented.

And, let’s face it, the regulatory maze more generally drives businesses and individuals into the black economy but is unlikely to be reformed any time soon, by any level of government. Illegal tobacco is partly the result of the extraordinary rise in the excise rate.

The idea that we can be educated to refuse to pay tradies cash and for tradies not to accept cash, at least for some of the work they undertake, is surely a joke. As for banning sales suppression technology (which helps understate income), good luck with that. If a business owner sees the advan­tages in this technology, the practicality of such a ban being effective is remote.

On the other hand, it would seem reasonable for the participants of the sharing economy — think Uber, Airbnb — to provide tax file/Australian business numbers and gross incomes to the Australian Taxation Office. There is also a case for cleaning up the ABN system that appears to be easily gamed, with large numbers of businesses simply quoting the Bunnings number.

When MYEFO rolls around this year, there is no doubt that a very big number will be booked as part of dealing with the black economy that will have no credibility. We would be much better served if the government directed most of its attention to cutting its own spending.