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Economic growth is the basis of increased prosperity. Investment in human resources together with the implementation of new production techniques and the introduction of new products are the fundamentals of the growth process.
Taxation can affect what choices are made and, ultimately, the rate of growth. Thus before assessing the effects of taxation, one should clarify an important distinction. Taxes are a necessary ‘evil’ but without a just level of taxation we cannot continue to enjoy the various benefits we’re familiar with.
On the other hand we need to constantly question the authorities about public spending and whether all in a position of trust including Government are doing their best to spend our money diligently.
As much as tax cuts may be seen as an opportunity for all, we also need to enquire whether the tax cuts will lead to the relegation of services provided by the state.
This may be argued on the basis that while we all seek better-quality services provided by the state, tax cuts may lead to the elimination of certain services or the deterioration of such.
So it is essential to strike a balance between just levels of taxation and services provided by the state.
With this in mind tax cuts should be of benefit to various strata in our workforce. Our taxation system should applaud the efforts by various workers at various workplaces with increased income for working extra hours. Workers should not be penalised for making an extra effort. A couple of extra Maltese Liri may lead workers to lose on social benefits which impinge adversely on the household income.
Tax reduction may also help at least in the short term to motivate the spending power of various categories in our society.
I am sure everybody would prefer not to pay taxes of any kind. But this is impossible. I trust that today perhaps more than ever before we are aware that governments can only put their electoral promises in place on their strength and ability to collect taxes from those who are in a position to pay their dues. Workers employed and registered on companies’ books pay their dues with the efficient Final Settlement System but much more needs to be done to curb tax evasion. The recent reports in the local media on this issue give one the creeps.
With the extensive tax evasion and tax avoidance by various quarters in our society the final question is raised if taxes had been lower, would economic growth have been higher?
The UHM supports the shift from the present income tax regime to a system of revenue collection based on consumption.
Gejtu Vella is Secretary General of the UHM
Politically, yes. Economically, no.
With a general election already on the horizon, it is understandable that the government may want to provide some palliative in order to mitigate the inevitable pain resulting from the imperative restructuring process the country has had to undergo in its economic set-up. Otherwise, how could we possibly deserve to be worthy members of the European Union?
This exercise has turned out to be more onerous than anticipated, but it was necessary for ensuring that our standard and quality of living is maintained. I reckon it to have been an achievement that an overall negative growth has been avoided during the restructuring years. The sad thing is that the fruits of the growth areas in the economy, especially the financial sector, have in the main enriched the foreigner and a few local speculators.
Unfortunately for the government, there is an even nearer horizon that the elections: its commitment to enter the Eurozone barely 17 months from now and with a very stiff Maastrich test to pass as a pre-requisite.
Even if one believes, which I do not, that the best stimulant our economy could be administered is a reduction in direct taxation, its benefits are not likely to be felt before some years, and gradually. Meanwhile, the loss of revenue to the exchequer will seriously thwart our fiscal deficit control mechanism and this could, justifiably, be perceived by the European Central Bank’s ‘examiners’ as unsustainable after we have been admitted to Euroland. It could land us in big trouble, perhaps forcing us to undo the tax reductions which brought it about, and worse. Certainly, not a good omen for the next administration in less than two years from now.
Unless, of course, in reducing the income tax burden on individuals and corporations operating in highly-competitive markets (both of which I agree with), the government is clever enough to make up for lost revenue, and by introducing a new tax that does not hurt the economy, is socially acceptable and costs nothing to collect. Such a tax could well be one based on the degree of oligopoly which the government reckons as prevailing in any particular sector of the economy and which has proven to have been the cause of monstrous super-profits, which is unthinkable in a truly competitive environment.
The financial and telecommunications sectors easily spring to mind, but there are several others on which a standard rate of income tax could be imposed higher than that for the ‘normal’ competitive scenario. And the resultant revenue is quite substantial.
KARM FARRUGIA is an economist
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