NEWS | Tuesday, 31 October 2007

Spiteri, Farrugia sceptical over Sant’s taxation proposal

James Debono

Alfred Sant’s proposal for a tax free overtime has been met with scepticism by former finance minister Lino Spiteri and veteran economist Karmenu Farrugia, who have warned that if overtime taxes are removed, employees will be encouraged to shift income from their basic pay, which will still be taxed, to overtime hours which will become tax-free.
But despite these reservations, Sant’s proposal already enjoys the qualified support of both major trade unions, the Union Haddiema Maqghudin (UHM) and the General Workers’ Union (GWU), as well as the Malta Chamber of SMEs (GRTU).
“It was the only part of Sant’s speech with which I disagreed,” Karmenu Farrugia told BusinessToday, who claims the proposal could lead to abuse.
“In small companies many businessmen give a wage to themselves and to their family members. If overtime is made tax-free they would start paying themselves less for normal work hours, while increasing the portion of overtime.”
He warned that since national insurance is paid on the basic wage and not on overtime, the measure would encourage employers to ask employees to declare a greater portion of income as overtime.
Also citing potential abuse, Lino Spiteri insisted that everybody should pay some income tax on earnings above a certain threshold. “I do not agree that one should exclude income from overtime which is at present taxable, when it surpasses a certain threshold from any taxes.”
Lino Spiteri comes up with an alternative: a flat tax on overtime. “It would make sense as a recognition of additional effort to tax all overtime at the part-time rate, which is at present 15 per cent, rather than at one’s marginal rate; but not to exclude it from tax completely.”
Asked by BusinessToday how the MLP will address potential abuse, Labour deputy leader Charles Mangion acknowledged that all taxation systems are liable to abuse, unless the government in charge is “pro-active, fair and vigilant”.
He said the present VAT and income tax regimes contain loopholes which can be abused. “While some of these are problems which have been solved, other problems remain in the air… but this should not lead us to paralysis in the matter of tax innovation related to the situation of those providing their work time.”
Mangion looks to other countries to legitimize his party’s proposals. “We are not reinventing the wheel on this issue. Other countries have been carrying out similar measures of tax relief on overtime, and we will build on their experience to introduce such measures without promoting a new field for abuses. It can be done. A new Labour administration will do it.”
He echoed Sarkozy’s “work more to earn more” electoral platform, arguing that making overtime tax-free would be a huge incentive for more work in this country. “An improvement in competitiveness should result, making new investment and work opportunities more attractive. Get people to work more, and more work will be created on a competitive basis.”
Mangion also said the MLP’s proposal will result in an overall decrease in costs, as the fixed costs carried by enterprises will be spread over an increasing volume of output.
The measure is in line with Labour’s plan to increase real growth to 4-6 per cent per annum on a sustainable, forward-looking basis. Mangion said tax-exempt overtime will be used to achieve this growth. “On top of all this, there’s of course an added bonus – the proposed measure would create more leverage for workers’ and employees’ families to improve the quality of their life. This is conducive to higher consumption and higher growth.”
Unions, employers react
Both major trade unions have given their qualified support to Sant’s proposal on overtime. “This is a positive measure for workers as they will have more money to spend. But we should pay attention so that the system is not abused,” GWU secretary-general Tony Zarb said.
The UHM’s Gejtu Vella was diplomatic in his answer. “We agree with a zero tax rate on overtime, with one important qualification: it should be given as an addition to the other benefits given in the budget,” Vella told BusinessToday. 4page 15

He also insisted he agrees with de-taxing overtime as long as this does not lead to new burdens to make up for a shortfall of revenue or an increase in the deficit.
GRTU director-general Vince Farrugia also approved while noting the proposal contrasts with Sant’s promise to have forfeited public holidays falling on a Saturday or Sunday awarded to workers as leave. “Any incentive encouraging workers to work and earn more is positive,” Farrugia said.
He said any measure encouraging the productive core of the country to work more would contribute to economic growth. But he disagreed with Sant’s promise to reintroduce holidays reduced by the present government.
“This contradicts all that he said about the need to spur economic growth. Either you encourage people to work and earn more, or you encourage them to take more holidays.”
Federation of Industry (FOI) president Martin Galea said the matter has not yet been discussed by the FOI. But he recalled the matter being discussed in the Malta Council for Economic and Social Development (MCESD).
“We had discussed a lower rate or a flat rate on overtime at the MCESD level. But there was a general concern that there could be abuse as people could shift from basic wage to overtime. The feeling was that it would be better to widen tax bands and keep tax on overtime.”

Overtime: from Sarkozy to Sant
Making overtime tax-free was the flagship of Sarkozy’s presidential campaign, during which he portrayed himself as the “work president”.
Public opinion polls in France have indicated this may have been his most popular proposal. Running his campaign on the “work more to earn more” platform, Sarkozy argued that this measure would give everyone the opportunity to earn more, and for France to gain the upper hand in the global economy.
French Prime Minister François Fillon argues: “This measure is destined to respond to two principal problems of French society... insufficient purchasing power, and shortage of hours worked.”
Sarkozy’s plan will cost his government €3 billion in forgone tax revenue.
The de-taxation of overtime was approved by the French senate on October 1, despite strong opposition by the Socialist-led opposition, which argued that the measure will prompt employers to hold back pay rises and resist hiring new workers, since overtime will give them greater flexibility at a low cost.
The measure was also criticised by economists Patrick Artus, Pierre Cahuc and André Sylberger, who presented a report to the Economic Analysis Council warning that French companies would prefer to pay overtime because it will cost less than hiring more staff.

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