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A comprehensive pre-budget document was issued on 30 July and the Prime Minister is welcoming comments from institutions and other interested parties by the end of this month. This is an innovative approach to widen the consultation process.
In the sixties the island blazed the trail for low and simple tax rates, for example through the concessionary tax free ten year holidays that attracted so many foreigners to set up manufacturing plants. Now over the past decades we witnessed the slow exodus of textile factories going to greener pastures, in particular in eastern Europe and the North Africa. Hopefully as members of an enlarged EU club there will be big benefits in enterprise, productivity and investment if the island's leading position can be regained. So what is the solution?
This appears to be the pertinent question blazoned on top of the government agenda. Can we start by revising the tax code as suggested by the document appointing a task force with pre-determined terms of reference or should we follow the trend of accession countries and introduce a simpler flat tax regime?
Our top tax rate started at 32.5 % up to the early nineties and was hiked to 35% and remained unchanged for the past decade. Is there any advantage for Malta to simplify its system and mull over a flat tax regime?
Flat tax lobbyists remark that our current system lowers national income and government revenues by inhibiting economic activity. The fruits pf a root and branch reform will be threefold - freer economic activity, increased national wealth and greater revenue for the state coffers. In fact the pre-budget document allows some measure of leeway for reform in this regard. A partial reform was spearheaded by Dr Austin Gatt the minister for Investments to help incentivise the film industry.
Perhaps more can be beefed up by proposing new tax incentives for the production of large budget films. Another novel idea is to appoint a tax Ombudsman who can act as a shelter for taxpayers protecting their rights against potential misuse of "ex ufficio" and the strenuous pressure exerted by TUC over corporate taxpayers.
Strategists plead for the creation of a venture fund with real tax concessions for seed capital. On the other hand the draconian measures to levy interest and penalties over tax arrears under protest is not helping to create trust among late payers. Neither is the notion that the department is tough against a type of taxpayer but has been generous with massive amnesties to evaders of undeclared foreign funds. These were de rigueur in the past three years. It goes without saying that in the 2006 budget the government needs to take action to release taxpayers from the tangled web of anomalies and unnecessary complexities that underpin our tax system.
Economists lament that without a tacit reform the present system inhibits savings, investment, and job creation as it imposes a heavy burden on middle class working families. Untouched it undermines the integrity of the democratic process. The regime consisting of both direct and indirect taxation is captivating more than 35% of GPD and of course this take is drying the cash-lake and regeneration of the economy.
Perhaps the task force can come out with an innovative tax system otherwise it is a squander. It must be completely replaced with a simple and more efficient alternative. New methods are needed to best meet the goal of collecting revenue in the simplest, fairest, and most transparent manner possible.
Germany's shadow finance minister Prof. Kirchhof thinks it is a very exciting idea, one that started in central and eastern Europe, but now is being looked at by other countries like Greece and there is strong speculation that if elected to government next week the CDU in Germany will be looking at it with a view to implement it.
Once implemented, all income is taxed only once and at one rate. There are no breaks for special interests and no loopholes for powerful lobbies, just a simple tax system that treats every taxpayer the same. But how can we jettison the progressive income tax rates so beloved by the unions? The introduction of such a system, which scraps progressively higher tax bands in favour of a uniform and usually low percentage, would be controversial, with opponents claiming it is little more than a tax cut for the rich. Yet paradoxically flat taxes have so far only been introduced in developing economies seeking to attract foreign investors.
A paperless solution which will be politically popular may be that workers and businesses will simply complete a tax return the size of a postcard. All deductions and credits would be eliminated, while the only income not subject to tax would be a generous personal exemption for every taxpayer.
Sadly we note that locally there is no attempt to distinguish the tax rate which SME 's pay from that charged to the larger quoted companies such as banks. Ask any politician about the possibility of rallying the economy and he /she will start ranting about the deficit having an indefinable strain on tax revenues. Providentially a pragmatic solution may be blowing in the wind. Just wait for the recommendations to the pre-budget document. The times ask us to be daring and stop delving into platitudes that make us stare like the hobgoblin of little minds
gmm@pkfmalta.com
The author is a partner with PKFMALTA an audit and business advisory firm.
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