How & why do we treat tax evasion & welfare fraud differently?

In both Australia and New Zealand, policy settings treat welfare fraud as more serious than tax evasion, prompting the assumption that this reflects community views.

Not so, reports New Zealand Taxation Professor Lisa Marriott in the post below, which wraps the findings of her work published in this edition of the Journal of Australian Tax.

Power to Persuade readers may also enjoy this Greed versus Need cartoon by Auckland based illustrator and comic artist Toby Morris.

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Professor Lisa Marriott writes:

Since 2012, I have been researching ways in which we treat tax evasion and welfare fraud differently. This article reports on a study I did with Dr Dalice Sim that builds on my prior work highlighting the different treatments of welfare fraudsters and tax evaders in the New Zealand criminal justice system. These findings include:

• Welfare recipients will be investigated for fraud at a higher rate than taxpayers. In most years, around 5 per cent of welfare recipients are investigated for fraud while around 0.01 per cent of taxpayers are investigated.
   
• In recent years, there have been 600-900 criminal prosecutions of welfare fraudsters per annum and 60-80 criminal prosecutions of tax evaders.
   
• A higher proportion of prison sentences are given to welfare fraudsters, for a lower level of offending, as compared to tax evaders. For an average level of offending of $76,000, 67 per cent of welfare fraudsters received a prison sentence. For an average level of offending of $229,000, 18 per cent of tax evaders received a prison sentence. (The $76,000 isn’t the average of all welfare fraud in NZ but the average of the most serious cases, which was necessary for the comparison as only the most serious of tax evasion cases are prosecuted.)

A portion of 'Greed vs Need' at Pencilsword, drawn by Toby Morris.

We can look to changes made to New Zealand's Social Security Act 1964 for further illustration of more punitive treatment of welfare fraudsters. The Act was amended in 2014 to allow for the partners of those who commit welfare fraud to be prosecuted for the crime and liable for any debt generated from the crime. This extension of liability is only for the partners of welfare recipients – the partners of other financial fraudsters, such as tax evaders, do not have the same treatment.

This research starts from the position that the crimes of tax evasion and welfare fraud are comparable. They are both deliberate, financial fraud. Moreover, the fraud has the same outcome – fewer resources for the government, and the same victim – society as a whole.

Highlighting the treatment of different ‘types’ of people for conceptually similar offending is one thing. What is considerably more challenging is trying to explain why this might be.

When I first started this project around six years ago, one of the things I set out to examine was whether the different treatments outlined above reflected society’s views and preferences. That is – did society in general believe that welfare fraud was a more serious offence and therefore was deserving of higher levels of investigation, more prosecutions and harsher sentences?

The academic literature not only suggests that the criminal justice system should reflect public preferences, but that courts attempt to reflect society’s preferences when making sentencing decisions. Therefore, it was expected that the outcomes from the criminal justice system were reflecting society’s preferences.

Surveying attitudes in NZ and Australia

Dalice and I used an online survey to capture society’s attitudes to tax evasion and welfare fraud. While the majority of my prior research had been focused on New Zealand, we also included Australia in the survey. We received responses from 3,000 respondents from Australia and New Zealand (1,500 in each country).

The survey was distributed to a representative sample of the New Zealand and Australian populations. Among a range of other questions, we asked 17 questions relating to attitudes on tax evasion and welfare fraud.

As the justice system is intended to reflect the views of society, we expected to see more negative attitudes towards welfare fraud. However, the results we found were not those expected. Instead, we found that – overall – respondents had a more negative attitude to tax evasion than to welfare fraud. This finding was statistically significant.

We collected a range of demographic information from survey participants: age, gender, ethnic group, education, income, occupation, income source and whether respondents had ever received a welfare benefit.

Statistical analysis showed that across all the different demographic groups, there were only two groups of people who viewed tax evasion more favourably than welfare fraud.

These two groups were those aged 20-24 and those with earnings from capital (e.g. returns from wealth, rather than traditional income earners). All other groups indicated that they perceived welfare fraud was less serious than tax evasion. Those with earnings from capital may have greater opportunity to minimise their tax obligations, which may help to explain their greater tolerance for tax evasion when compared to welfare fraud.

We found greater concern for welfare fraud among those who are older, female, higher-income earners and more educated. This may, at least in part, reflect that those who are older, more educated and higher earners may have reduced use of the welfare system and therefore have reduced tolerance for fraud within the system.

The presence of females showing more concern for welfare fraud than males was unexpected. This contrasts with much of the literature, which suggests that women are more likely to be concerned about the well-being of others, particularly when those others are socially disadvantaged.

We found those who were older and female also had more concern for tax evasion than other demographic groups. Also of interest was that New Zealanders showed less favourable attitudes towards both crimes when compared to Australians. It is possible that differences in the welfare and tax systems may help to explain this.   

Challenging different treatment by the law

The survey findings challenge current practice in New Zealand that results in the different treatment of welfare fraudsters and tax evaders in the justice system. If the criminal justice system was reflecting the views and preferences of society, the outcomes of this study indicate that tax evasion should be the crime receiving harsher treatment.

So, what is a possible solution?

Perhaps sentencing guideline judgments for financial crime offer a sensible solution. The harm generated from financial crime is readily quantified, thereby allowing for an identifiable starting point from which to start sentencing. Mitigating and aggravating factors can then be taken into account as necessary.

This would help to ensure consistency in sentencing across ‘similar’ cases and would provide for greater transparency when differences in sentencing result in cases of tax evasion and welfare fraud cases that have equivalent amounts of financial loss.  

Historically, it may have been that tax evasion was seen as a less serious offence than welfare fraud. Our research suggests that if that view did once exist, it no longer does. Changes in views towards tax may have come about from the proliferation of high-profile tax evasion cases that are widely reported in the media. It may also be that people are more informed about the broad impact when people do not meet their tax obligations.

Whatever the reason, it would appear that the criminal justice system – in relation to tax evasion and welfare fraud – is no longer reflecting the views of society.

Lisa Marriott is Professor of Taxation at Victoria University of Wellington, New Zealand.