The problem with draconian laws

Last Sunday, Labour leader Joseph Muscat criticised the fines and interest being charged by the government, describing them as legalising usury and claiming they are leading many small businesses to bankruptcy.

The deterrent should not be so draconian as to render itself impractical- Michael Falzon

Apparently he was ‘inspired’ to make this accusation following news that some 120 small businessmen had been given a prison sentence after they had defaulted on their VAT payments.

To reinforce the political aspect of this statistic, Muscat accused the government of preferring to put these businessmen in prison rather than encouraging them to put their businesses on the right track and so contributing to the much-needed economic growth.

Undoubtedly, Muscat was playing with the emotions of these people to gain some political points. Yet, his argument can hardly be dismissed in the way the government subsequently did.

Muscat was accused of defending those who did not pay the tax they would have collected from consumers, to the detriment of citizens and honest businessmen, and of encouraging law breakers; and so undermining the majority of self-employed and businessmen who paid their VAT on time.

The 120 cases of imprisonment dwindled down to four who are currently in prison for failing to pay VAT due, as 75 per cent of the people sent to prison paid the fine on the first day or after the first few days of their sentence.

According to the two ministers who made the official statement, “this clearly showed” that the system was working as a deterrent and justice was being done even with those who obey the law.

Incidentally, throwing people in prison because of debts and releasing them as soon as they – or someone on their behalf – paid the moneys due, sounds somewhat medieval in 2012. But this is not my point today.

The Finance Minister apparently forgot that in his Budget speech last November, he announced a VAT arrears ‘amnesty’ covering up to 80 per cent of the fines and interest accrued on outstanding VAT payments, applicable to those who failed to submit their returns on time; and later extended the deadline for this VAT amnesty from the originally announced mid-January to the end of this year.

Compare this with another interesting four-year-old statistic: of 339 Presidential pardons granted between 2003 and 2008, a total of 90 per cent were actually VAT amnesties.

Going by the reasoning in the official statement issued to rebut Joseph Muscat, the government itself is also defending those who do not pay the tax on time and encouraging them at the expense of the majority of self-employed and businessmen who do.

Clearly something is wrong somewhere. While I understand the seriousness of the crime of collecting tax and not passing it on to the government, it is obvious that the fines and penalties for not filing the VAT return and delaying the remittance of the collected moneys are proving to be draconian and hence impractical.

Surely there is something amiss in the imposition of a fine on a business such that its payment would lead to the business going bankrupt. Otherwise, the amnes­ties referred to above would not have been justified. After all, there is a physical limit on how many people can be sent to prison at the taxpayer’s expense.

The problems caused by draconian laws are known all over the world. Keeping to Maltese examples, I recall the case of a Swiss woman who came to Malta as a tourist and who was given a six-month prison sentence for having a cannabis joint. As a result of the legislator’s enthusiasm to fight the drug scourge, for some time the law stipulated that anybody who imports drugs is a drug trafficker even when the drug was in small amounts and obviously for personal use only.

The courts had no option but to impose the minimum sentence set out by the law – hence the saga of the Swiss tourist who spent her holiday at the ‘Corradino Hilton’! Since then the law was amended to avoid such nonsense.

I mention this case because it is a good example of the unintended consequences of draconian laws that leave no discretion in the hands of the courts. I venture to state that the VAT law is proving to be impractical also in this respect: rather than amnesties and political squabbles, we had better come up with sensible solutions to the problem.

The solution is not easy. VAT fines are related to the amount due and to the time delay in remitting the tax and/or submitting the obligatory return. Over a long period, the penalties and the monthly interests could add up to an enormous sum of money that cannot be possibly paid.

On one hand, one must come up with a good and effective deterrent; on the other hand the deterrent should not be so draconian as to render itself impractical as happens when those found guilty are put in a position where they cannot pay the penalties.

Considering this situation, amending the VAT laws by introducing different types of punishments – such as temporary suspensions of trading licences – would in the end make more sense.

micfal@maltanet.net