As Government continues to grapple with our current economic position and implements its chosen policies and programmes to bring about economic recovery in the future, there has been much ado about our domestic tax policy over the past few weeks, including further “advice” from the International Monetary Fund
as to the way we should go.
The IMF, to my best recollection, mounted a public relations campaign in the last 12 months or so, in an effort change the minds of governments and more importantly their citizens, especially in developing countries that the organization does indeed have a heart, and further that it may have issued too strong an economic medicine to many of these countries.
In broad terms, the advice, findings and recommendations of the agency in the context of last year’s Article IV consultation and its recent visits suggest, as we can all agree, that greater focus and attention are needed in the management and reform of:
(1) Statutory and other Government-funded agencies;
(2) Our tax system;
(3) Public sector employment levels;
(4) Growth initiatives for key earning sectors.
The Barbados Government has engaged CARTAC –– an IMF agency for technical assistance –– to conduct research and report back on the first two items listed above and in turn Cabinet has approved the formation of two committees to review these reports and make final recommendations as to what would be an acceptable way forward.
Most recently, however, the IMF has highlighted some $2 billion in personal tax allowances and deductions, suggesting that Government needed to address it urgently. This is where I am led to ask if the Fund had already lost the heart that it so recently desperately tried to prove it indeed had within its bosom.
Why is it that most of the reformatory measures, whether taxation or otherwise, appear destined each step of the way to decimate an already hurting middle class –– the same middle class that has been called upon to sacrifice employment, cough up UWI fees, pay a solid waste tax, and pay a consolidation tax, all on top of already existing taxes.
And note, by no means am I omitting the lower income section of our society; but I have highlighted the middle class, as traditionally they have borne the bulk effect of most tax measures and policies.
To remove, reduce or eliminate such provisions, especially at a time of crisis where incomes have essentially been frozen at near 2010 levels, would be a tragedy for many households, in my opinion. The level of allowances and exemptions over the past six to seven years has been the means of survival for many households.
The allowances for spouses, children, and the personal allowance should no doubt remain. However, I would support a review of other allowances in order to assess their effectiveness, based their intended purpose. For example, are the allowances for energy, medical, and so on, really bearing the fruit anticipated. If they are not, then a case could be made for their removal.
Additional allowances for contributions to political parties, NIS for household staff and so on may well have outlived their purpose.
This writer is in no way against structured and meaningful tax reform, but will fight against any reckless dismantling of a tax structure that while extracting taxes has also afforded some level of comfort to many households. For me, one question remains. Noting the value of the allowances
($2.4 billion) and Government actually only netting $1.3 billion of total assessable income as a result, I ask how are these allowances of $2.4 billion spread across the taxpaying public? Who is really benefiting from the bulk of the allowances?
While I am not aware of the full mandate or work plan of the committee approved by Cabinet to review the CARTAC report, I would endeavour to offer the following advice with respect to tax reform:
1. Improved administration and collection: On April 1, Government realized its plan in the launching of the Barbados Revenue Authority (BRA), with new legislation and operational rules. This should continue to be the major plank in any reformation of our domestic tax system. The BRA should be encouraged to expedite its internal processes to facilitate netting of taxpayer balances across agencies; authorizing of payment plans for individuals/businesses facing hardship; e-commerce solutions for electronic remittance of taxes; issuing of clearances, and so on. While there are several legitimate reasons for non-filing, late filings and late or non-payments of tax, overall we can improve on our collection by working with taxpayers more closely on filing and remittance.
2. Tax waivers and concessions: The use of tax waivers and concessions are often necessary as an incentive, especially in certain industries to attract investment, which will ultimately lead to new employment, new economic activity and so on. However, the extent and level of their use have to be closely monitored, as the end result is naturally a decline in future tax revenues (a major component of Government fiscal management). I would advise that, as far as feasible, the authority for such waivers be enshrined in legislation governing earning sectors and key industries, rather than being left to the discretion of Cabinet or ministries. If these waivers are too high, ultimately revenue shortfall can only be replaced via additional taxation on individual taxpayers. We are not privy to the statistics in respect of level of tax waivers in any given year, but in all instances the return to the economy should also far exceed the value of such waivers and concessions. Ultimately, many of these waivers go to companies or individuals that can afford to pay their share of taxes and still maintain employment levels, but such waivers often guarantee these entities certain profit levels at the expense of others.
3. Widening of tax base: The IMF suggests that a widening of the base will be through extracting more from the same people (fewer allowances, maybe higher rates). However, this can be accomplished through a creative programme to capture those “informal” or loosely structured businesses currently below the tax radar, but generating sound incomes.
The aim here is to subject such persons/entities to a low introductory or incubator tax rate that then graduates towards the full corporation tax rate over a specified period as the business and its profits grow.
As I exhaust my weekly allowance of space, as emphatic as I am about taxation not being the means out of our economic woes, neither can we sacrifice any class in our society to get there either. History and statistics will bear me out in terms of the level of burden that fiscal year after fiscal year the middle class has been called upon to bear.
(David Simpson is immediate past president of ICAB and a director of the Barbados Entrepreneurship Foundation (BEF), and serves as co-champion of its finance pillar.)