Opinion - George M. Mangion | Wednesday, 26 March 2008

Tax without tears

The merits of uprooting regressive taxes have recently hit the headlines prior to elections mainly in the manifestos of the smaller parties.The new prime minister contemplates this in a mood to paint our taxes green.
In fact the fair isle of Gozo is destined to be morphed into an ecological paradise. This calls for a concerted use of renewable energy and better protection of the environment. This is all very desirable. Regrettably, there was no marked emphasis during the agitated pre-election debates to smoothen down direct taxes and replace them with a new code based on environmental impact. Yet the message by the electorate to the re-elected party was unequivocal - let us quickly reform our ways.
Following the constitution of a new cabinet filled with young Turks one expects promises to be honoured. Ideally, a task force of non-partisan experts should be entrusted with the execution of this reform within a brief timeframe.
Such a reform will, of necessity, embrace the designing of ecological taxes - the polluter pays principle. An independent agency which trades in carbon footprints or exchange of carbon credits is a logical step to take.
How can we afford to maintain the omnipresent rate of poisoning in the environment particularly with heavy traffic and an aging Marsa power station? But to reform, we need funds and as these cannot be borrowed ergo more taxes is the sour answer.
A Catch 22 dilemma. Tax is always an emotive issue especially hot on the heels of electoral promises such as halving the surcharge and brandishing tax-free overtime. The Nationalists also blew the trumpets of a lower 25% top rate on managers/ middle income groups. In the election bravado assurances were spelled on cast iron guarantees on free health & education of a world class calibre. Health is costing us a tidy sum and is bound to escalate when Mater Dei hospital reaches its peak.
The textbook solution tells us that oppressive taxation wouldn’t be necessary without an over-burdened welfare state. Too much juggling is expected in the pipeline if we clamour for a balanced budget while maintaining the status quo on freebies. But not everything is doom and gloom.
With an improved GDP growth of 3.8% which was breathtakingly high in 2007 we expect more pleasant surprises from this legisalature .Who would have predicted that the 10% of GDP deficit registered in 2003 would be trimmed down to under 2% last year? Again the good news that talks with US on the signing of a double taxation agreeement have resumed this week is another good omen.
The FOI and GRTU both lament that it is unwarranted red tape by government agencies rather than competition from foreign suppliers that stifles economic and business development. By sheer contrast, the ex-Communist countries that joined the EU have lost no time to reduce corporate taxes and are registering high GDP growth rates. Experts agree that tax competition is healthy among EU members.
It tends to keep inflation scares lower, which creates pressure for less wasteful and therefore more efficient use of public funds. But only last month a legal notice was meekly posted introducing more complex tax accounting rules laced with severe penalties for the unwary practitioner. More than 200 accountants flocked to a 3 hour seminar hosted by the Institute of Taxation to grasp its finer issues.
All this re-structuring is to have retrospective effect starting from 1st January 2007. Who said retropsective measures are draconian?
Authorities are going into overdrive to segregate tax streams originatining from the new concept of economic rent. For example, any hotel (large or small) is duty bound to segregate its 2007 revenues and allocate shared expenses between room revenues under the 5% VAT rule distinguished from all other revenue earning amenities such as restaurants, wine bars, tours, excursions, sun umbrellas, car hire etc.
Any mistakes in allocation which result in issuing of the wrong tax credits on dividends carry a penalty plus interest at 7%. Plasterers,whitewashers,electricians, property developers and anyone even remotely connected with the building trade will be expected to allocate results into a specific immovable property divorced from M.T account.
All this does not foster simplicity but adds more tears on SME’s in general.
Certainly more red tape and less red carpet. Does this issue matter?
It does. especially in a world which generally espouses free cross-border trade and investment. Multinationals are free to re-locate to a country that makes most sense from a tax point of view. Granted that we need to boslter our marketing effort citing our advantages such that corporate tax is fully imputed to shareholders upon declaration of dividends.
Another issue is corporate “inversions,” which take place when a company respects the interests of its shareholders by moving its manufacturing base to a jurisdiction with better tax laws and lower labour costs. But wouldn’t it be a better idea if our politicians are more enlightened to reform the tax regime within the confines of EU laws? Surrealistically politicians have also been squabbling about the fact that our corporate tax is the fairest. A reform minimises bureaucracy and paperwork which is enemy number one for small and medium sized enterprises.
The problem isn’t just with business taxation. So far there were positive moves to lower personal income taxes. Surrealistically the 2008 budget reveals how only two-thirds of workers are taxable.
Conversely, union officials love to argue about whether the ‘rich’ pay their fair share. This mentality urgently needs revision since it exacerbates a disincentive to work particularly for working couples.
Simplicity means more transparency and higher fiscal morality. Does it sound too good to be true? Well, it’s already working in many other countries.
It’s frustrating to see other EU countries adopt the flat tax which in Malta has been resisted by tax lobbyists ostensibly as it may increase tax leakages. Flat tax is not a perfect solution but neither is the status quo.
On its own it cannot be the one size fits all solution as much depends on the pervasive efforts of Malta Enterprise, Finance Malta and the Dar Malta contingent resident in Brussels.
Dr Gonzi proposed inter alia turning our taxes green. Perhaps now is the time to act boldly when the political will is conducive to administer the deepest cut. Our green fairy Godfather may again work wonders as he did when he wrestled and tamed Medusa the deficit monster.