Tax and welfare debt

Laura Walters at Stuff reports:

Government agencies are more likely to write off unpaid tax than welfare debt, new research shows.

Victoria University accounting and commercial law associate professor Lisa Marriott’s research showed Inland Revenue was more likely to write off unpaid tax than the Ministry of Social Development (MSD) was to write off welfare debts.

So why might this be?

“There appears to be no basis for treating debtors to the two government agencies differently,” Marriott said.

I agree, but are they treated differently when different factors are accounted for?

Between July 1, 2011, and June 2012, Inland Revenue wrote off nearly 50 per cent of interest and penalties applied to overdue tax, amounting to $374 million.

It wrote off $435m in core debt, reflecting 11.6 per cent of collectable debt, the study showed.

MSD wrote off $8.7m in core debt, or 2.1 per cent of collectable debt.

The study showed that in the same period, the average value of outstanding tax debt was $14,479 per taxpayer in debt, while the average value of outstanding welfare debt was $2523 per beneficiary in debt.

And that is the key difference – the level of debt. The more debt that is owed, the less likely it is the person owing it can pay it. Those with high levels of debt can choose bankruptcy which means almost no debt gets paid. Hence you sometimes work out a compromise.

The research is interesting, but not conclusive. What would be more useful if an analysis of how much is written off by IRD and MSD for debts of a similar level. I doubt IRD writes off many debts when say just $1,000 is owed.

MSD would collect debts from beneficiaries’ payments, she said.

That may explain some of the difference also. IRD can’t just simply deduct tax owed from money it pays you. At best it can go to your bank or employer and ask them to do it.