Evading taxing ethics

It was inevitable that the government would have to try to regulate the massive amount of currency in circulation washing around in the run-up to the adoption of the euro. The inexplicable part is why the authorities took so long to do it. The delay cannot be related to uncertainty about satisfying the Maastricht criteria. Targeting domestic financial assets that reflect tax evasion was the planned second leg of a policy announced several years ago.

The first leg was the registration of foreign assets programme. That was intended both to regularise as well as to raise cash for the public coffers. It was logical to set up a parallel scheme for domestic assets. With the effort to prepare for euro adoption, the logical became imperative.

The government prevaricated. It signalled strongly that it would not be giving further "absolution subject to penance" to tax evaders. Now, foreseeable circumstances have forced its hand. The domestic assets registration scheme was forced out of the hands of the authorities, which is never a sign of measured planning.

For months there has developed a strong unofficial market in euros. Those who played it, frantically exchanging their Malta lira currency notes, were taking various risks, including that they would end up with counterfeit euros. They ignored the risk because of their fear that they would end up with a worthless Lm hoard.

It remains to be seen whether they will now take up to much extent the window-passage opened by the government. It will cost them four per cent, plus the equivalent of a year's net deposit interest, which they were foregoing anyway. That translates into a cost of six per cent for the wily who stashed money that had evaded tax into bank deposits, paying 15 per cent final withholding tax at source and hoping that would be the end of the blackness in the story.

The objective of the scheme is financially sound. It is initially to sterilise black funds that might rush (are rushing) to chase property and other purchases, pushing up inflation, and eventually - after one year - to allow the sterilised funds back into legitimate economic activity, depending on their owners' choice.

Such soundness clashes with the ethics of the affair. As various contributors to the letter columns have pointed out, this is one more concession to tax evaders, who will get away with tax evasion, unlike those who pay their taxes without fail. There will always be at least two sides to an argument. Those who speak from the standpoint of ethics are correct. Those who say that inflationary threats must be wrung out of the economy, are also correct, though they are not on any high moral ground.

Had the government prepared the domestic assets registration scheme in advance it could have hit two birds at one throw. It could have prepared the general public better, explaining why the balance had to go against fiscal morality in this case, and it might have reduced the rush to buy euros, which has not impacted at all kindly on the country's official foreign currency reserves.

Looking ahead the authorities now have to focus on promoting the registration scheme for all they're worth, as well as on devising better means of ensuring fiscal morality from now on, starting with a strong offensive against those who do not come into line by the time the registration scheme ends in July.

If all this serves to bring the concept of fiscal morality back to life, and give it its due role on the centre stage of financial affairs, ethics and practicality can move forward hand in hand.