Race to the bottom

Listening to the proposals put forward by the two major parties on tax sounds like an auction, with Prime Minister Joseph Muscat and Opposition leader Simon Busuttil trying to outbid each other in an attempt to lure voters before the 3 June election. 

Yesterday, Busuttil said a new PN government would slash income tax to 10% for those earning up to €20,000 and for all self-employed people and small businesses on their first €50,000 in profit. This comes in the wake of Muscat’s proposal to give a tax refund to all people who earn €60,000 or less. Speaking to Labour Party supporters in Rabat on the third day of the month-long electoral campaign, Muscat had announced that taxpayers would benefit from annual refunds ranging from €200 to €340 if they re-elect Labour. One cannot be blamed for thinking this is a race to the bottom as this is happening in the context of both parties promising voters to put more money in their pockets. 

Tax rates have already been cut by the previous PN government and by the outgoing Labour administration, with people earning between €19,501 and €60,000 enjoying a gradual 10% tax cut. 

The problem we currently face in regard to taxation is twofold. First, it seems that policy makers and much of the public agree that taxes should be slashed for everyone.  If you’ve been listening to the two major parties, you would certainly come to the conclusion that taxes are bad. Mainstream parties have consistently given the impression that taxes are bad because Maltese are overtaxed and taxes hurt economic growth.

Secondly, the challenges of demographics, especially our aging population and inequality, require more revenue in coming years to meet these challenges without generating unsustainable deficits.

Malta’s fiscal policy must be reformed, not only to make it fairer but also to combat tax evasion. Taxes are not bad. In Malta and abroad, many see income tax as an encroachment on personal liberty and others decry the system as economically or morally perverse. 

But our taxes are used – or should be used – to sustian the welfare system, care for the elderly, retain free healthcare, provide public education, protect the environment, build new roads, subsidise public transport and so on. 

A progressive income tax system, based on the ethical consideration that those who can contribute more should do so proportionally, should be in place. 

Wealthier sections of the population should pay a higher effective rate of tax on their income and wealth while ceilings for low-income earners should be raised, in order that tax-free income for such persons is increased. 

Some argue that the less tax people pay on their income, the more they will consume and the more indirect taxes will be collected. But VAT, while having its advantages, also tends to be regressive, as low-income earners spend almost all their income on consumption, ending up paying more proportionately. 

Progressive income tax is a powerful tool to reduce income inequality and the middle and the lower income classes benefit greatly from revenue generated, whereas those taxed at the highest rates experience relatively small changes, if any, in their quality of life.

This is ever more relevant following the Panama Papers which exposed the global financial system which enables the rich to evade tax, albeit in a legal way. Last year, leaders of the World Bank and the International Monetary Fund (IMF) warned that the industrial scale of international tax avoidance revealed by the Panama Papers represents a “great concern” for the global economy and is having a “tremendously negative effect on our mission to end poverty.” The real concern is that it is perfectly legal for the elite to park their money offshore and avoid paying tax, effectively depriving the State of money which could be used to improve hospitals, schools, roads and the welfare system. Simply put, tax avoidance proliferates inequality. The solution is a fair tax system which guarantees a fair distribution of wealth and not a race to the bottom between parties trying to win the election by proposing unsustainable cuts.