EDITORIAL | Wednesday, 13 February 2008

Tax less, collect more

The central issue in this election campaign has until now been taxation.
All four political parties are promising changes in our fiscal regime. All proposals are based on the economic mantra that if people are left with more disposable income in their pockets their spending power will increase and consequently the motor of the economy will gain further momentum. All parties are ultimately banking on increased economic growth rates being achieved this year.
This newspaper certainly believes in the need to cut taxation drastically as a way of stimulating the economy however it insists that all the financial discipline exerted by government in the last four years is not thrown to the wind less all the sacrifices made will have proved to have been done in vain.
Hence the costings of these proposals is of fundamental importance. Entering euro zone is not an end in itself but the beginning of a commitment to retain fiscal discipline. If broken our government can expect warnings and serious censure from Europe. It is also worth noting that increased consumer spending will inevitably lead to further foreign goods consumption increasing our importation bill. This will have a detrimental effect on our balance of payments account. This puts added pressure on the need to ensure a competitive export industry and tourism sector to make up for the imbalance.
Worthy of note is also the fact that all political parties are banking on increased growth rates which may be over-optimistic in today’s economic world climate with America on the threshold of a recession which can well spread into Europe within the next few months. It is also worth mentioning that the weakening sterling with its inevitable effect on our tourism industry.
The promises from all four political parties deserves analysis. The party in government is promising a drastic cut in taxation by adjustments made to the tax bands. This measure will certainly better the lifestyle of the majority of taxpayers in the middle and high end of the scale. The very same persons who years ago were stung with the harsh application of taxation on fringe benefits and allowances. These measures had penalised these income earners drastically and served as a disincentive, if not also disengaged them from their natural political homes. These new measures being proposed should help alleviate their condition.
To this extent it is most welcome since these particular persons who mainly work in the private sector are in fact the main motors of the economy. Persons who are self-reliant and do not need any subsidies from government at all. They give and do not take from the system and consequently it is only right that they are rewarded. This newspaper welcomes this initiative as it rewards hard work.
The proposal being put forward by the Labour Party is to remove taxation on overtime. This certainly serves as welcome news to the average worker who has enthusiastically embraced this proposal but risks opening up a hornet’s nest by encouraging tax avoidance and minimising the national insurance that will be paid by employers. It is highly risky and has been criticised by all leading economists, some of whom believe it can have a devastating effect on the economy.
This measure on its own without any limit cannot be implemented unless Labour wants to dismantle the fundamental concept of income tax.
The Green Party is proposing a reduction in the tax band of the highest earners and all companies as well as a flat rate of 15 per cent on rental income. These proposals are certainly business friendly and give recognition to the hard work and contribution of the very high earners and companies to the economy. The lowering of taxation on companies is particularly welcome as it allows family companies who are not a burden on the state to enjoy the fruits of their labour. They are the only party to advocate an increase in taxation on the banking sector to make up for the potential loss of revenue. While the banking sector is practically an oligopoly dominated by two giants, before any increase in taxation on the sector is implemented one has to analyse the possible impact on confidence in the financial services sector.
Azzjoni Nazzjonali on the other hand are proposing an 18 per cent flat tax rate. This is a novel idea in the country, which has proved successful overseas in a hand full of countries including Lithuania and Estonia which have had good economic growth rates. It certainly incentivises people to work harder in the full knowledge that by doing so they will also enjoy the fruits of their labour. While welcoming this initiative as a business friendly measures it must be pointed out that there is inbuilt inequality in the proposal.
These proposals all have their positive consequences on the tax payers, the consequences on the economy are still to be assessed.
We are cautious about the growth rates promised. However, any tax cut if done prudently will lead to substantially higher revenue yields for government.
If experience is anything to go by it is worth pointing out that when George Bonello Dupuis reduced income tax from 65% to 35% government collected more tax. The same happened when John Dalli adjusted the tax bands and introduced a flat 15% tax on bank interest.
The proposals are based on the economic tenet that less taxes will yield more. This newspaper certainly gives the thumps up to these initiatives.