Moral hazard is defined as lack of initiative to guard against risk where one is protected from its consequences. The details given so far about the scheme popularly branded as property-for-tax swap can easily lead to moral hazard as property developers take big risks with building commercial and residential property knowing that if they do not sell such properties they can always rely on the Inland Revenue Department bailing them out.

When governments start to meddle with market forces, it is time for ordinary people to get really worried. Speculative property developments carry a high risk, especially if a bubble is building up, making it easier for supply to exceed demand. Banks know a thing or two about the risks of lending for speculative development. When things go wrong, speculators are often taken to court and their property sold in judicial auctions, usually at knocked down prices.

Most tax dues are privileged debts that rank before any other dues and the Inland Revenue Department can execute its rights over the property by asking the court to sell the property of tax debtors by judicial auction. Debtors do not like this process as their failure to sell their property in the open market means they are unlikely to get the speculative returns they would have hoped for.

If the government starts engaging in schemes that appear to consist of rescue operations of zombie developments that the property market simply does not absorb it will be encouraging more speculation by developers prepared to ignore their legal obligations to pay their tax dues and hope for some sort of help to make up for their own negligence. Lawyer Robert Abela is therefore right in saying that “a dangerous precedent could be set if outstanding tax bills are settled through a property transfer to government”.

If the government wants to have an adequate pool of housing units meant for social purposes, which, of course, is commendable, there are surely other initiatives it can take. It is disturbing to follow Social Policy Minister Michael Farrugia’s logic when he declares that “this is an innovative government and the fact that it has not been done before does not mean it cannot be done now”.

Normal law-abiding people who pay their tax bills as and when they become due do not expect the Inland Revenue Department to barter their tax arrears for a used car or furniture. They either borrow money from the bank to pay their tax bills or sell some of their assets for the same purpose. Why should business people, who have access to tax consultants or auditors, expect to be treated differently?

The provision of social housing is indeed a priority not just because political elections are round the corner. Proper planning by social policymakers should have ensured that the government either commissioned such housing projects or bought properties in the open market. Deals struck in ‘secret’ negotiations by the Inland Revenue Department with developers who failed to sell their properties is yet another example of bad governance in the public sector and unnecessary interference with the dynamics of a transparent property market.

The government should regulate markets and not be an active player in them. It should also enforce compliance with tax laws by collecting what is due to it in a timely fashion. Devising schemes to hide the government’s lack of ability to collect taxes can only encourage people to abuse, knowing that yet another tax amnesty will save them from legal sanctions.

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