Editorial: A cultural change for tax-gatherers

Not before time, life is to be made a little easier for people who get into trouble with the tax department. For too long the department has been cast into the role of executioner of companies that for any reason cannot pay tax on time. As a result of a parliamentary select committee inquiry into Inland Revenue's pursuit of defaulters, legislation will be introduced to allow the department to exercise more discretion.

It will, for example, be able to recover more of a debt by allowing payment by instalments rather than issuing bankruptcy proceedings and threats of liquidation. And it will be able to write off amounts smaller than the likely cost of trying to recover them. If arrangements such as those sound sensible and obvious, they nevertheless herald a cultural change for the tax-gatherers.

As one tax adviser observes, however, the law is not the only element that must change. About 80 per cent of the problem, he believes, lies in how the law is administered. He may be a little harsh. The attitudes prevailing in any part of the public service have much to do with the law they must carry out and the guiding principles they are given from the top.

It seemed to go unnoticed by Inland Revenue's leading parliamentary critic, Act MP Rodney Hide, that the strict, inflexible tax administration he exposed was completely in accord with the economic principles he supports.

A market-oriented economy requires the Government to neutralise its influences on business behaviour as far as possible. Tax favours to any company or sector were to be avoided for fear they would attract investment to activities that might not be the most lucrative for the country in the long run.

It follows that tax obligations should be enforced equally and fairly rigidly.

The change of Government brought a different attitude. The Labour-led Coalition proclaims itself an active partner of promising sectors of the economy and does not sound averse, in theory at least, to selective tax incentives, although it has been wary of introducing them. It will not be troubled by the idea that a bit of forbearance with taxpayers in difficulty might distort the system.

It will be anxious, though, to maintain the revenue. Its proposed legislation is intended to encourage those in difficulty to contact Inland Revenue as soon as possible. Since a call to the department will be enough to stop clocking up penalty dues, there will be an incentive to do so quickly. And so long as more lenient repayment arrangements are honoured, any penalties incurred will be waived.

If the system works as hoped, the Government should gain more revenue than it would have recovered by pursuing defaulters to the point of bankruptcy. But that presumes the lenient regime does not weaken the incentives to pay tax when it is due. Much might depend on the ability of Inland Revenue to discern genuine cases of hardship among those who might contact the department to stop the clock on penalty payments.

At least the legislation should give tax gatherers the clear message that their mission is not to close down small companies that get into financial difficulties; it is to help them keep going if at all possible. No business is worth saving if it is unlikely to be profitable and cannot contribute its share to the upkeep of the state in which it functions. But it is not the business of tax-gatherers to sign its death warrant. A more helpful system should leave everyone better off.