Let’s turn Mitt Romney’s famous 2012 remark on its head and ask “if people were corporations too, how much tax would they pay?” The answer is almost nothing. Why, what is the difference and why does it matter? Companies pay tax only on profits, whilst people pay tax on income.
Most people don’t understand the fundamental difference between the way personal versus business earnings are assessed to taxation and how current taxation policy is biased against ordinary working people because of the changes which have taken place since the 1992 IMF budget to advantage corporations, businesses and the higher income earners, shifting the majority of the tax burden downwards onto the backs of wage earners.
In his book Eyewitness to Order and Disorder, Harold Hoyte writes of former Prime Minister Sandiford who on October 31, 1992 ‘revealed the long awaited details of his Letter of Intent to the IMF: ”Over the next two years, Government plans to undertake a tax reform programme aimed at broadening the tax base, removing disincentives to exports and simplifying the tax system.”’
This “broadening of the tax base” and “simplifying the tax system” are euphemisms for increasing taxation on working people by means of indirect taxation on goods and services (Duties, NRSL, other Sales Taxes and VAT), reducing, or removing allowances for personal tax, reducing the number of tax brackets and different rates (in this case to two only) so that individuals in the lower brackets paid more, whilst those previously in higher brackets had their taxes lowered.
This process has continued progressively through three administrations – Sandiford, Arthur and Stuart – and I believe is one of the reasons the Barbados economy has stagnated, as the majority of people simply have little or no money to spend after covering the basic essentials. Businesses cannot make profits if their customers cannot afford to buy their goods.
Personal Income Tax is assessed on the whole of the individual’s pay check, or pension, less only those “Allowances” granted by the whims of the Government of the day, which change with each budget as the Minister determines how much money he will need to run the country and where he will source those funds.
Recent budgets have reduced those allowances to a bare minimum. A “Personal Allowance” of $25,000.00, or a little over $2,000.00/month, and “Child Allowance” of $1,000.00 ($83.33/month- which idiot thinks you can raise a child on $83.33 a month?). In 1993 this was restricted to a maximum of two children. For the majority of working people – middle, lower-middle and lower income, there are no other “Allowances”.
Thus for working people, Tax is deducted at 16% on the first 35,000.00 after deducting these allowances and at 33.5% for any earnings after that. Someone earning $3,000/month ($692.31/wk, or $138.46/day) with one child (or claiming $500.00 each for two) will pay 16%X10,000 = $1,600.00 Income Tax. A manager or lower level professional earning $6,000/month will pay $9,285.00 in Income Tax. Persons earning $10,000, $15,000, $20,000/month – and there are top executives, professionals and expatriate “experts” earning these sums, pay at the same 33.5% as all the higher rates were removed in the 1992 budget.
And Income Tax is only the start. The first $25,000 is not really tax free as NIS (which is another tax imposed by Government –the Americans call it “payroll tax”) is deducted at 10.1% on up to $4650/month, or $55,800/year. NIS actually increases your tax rates to 10.1% on the first $26,000 (assuming one child), 26.1% on the next $29,800, reducing to 16% from $29,800 – $61,000 and 33.5% above that.
NIS contributions used to be deducted before calculating income assessable to taxation, but in 1992 this was changed, so that both NIS and Income Tax are charged on the portion between $26,000 and $55,800, that is between $2167 and $4650/month, or $500 and $1073/week – the salary range of most ordinary Barbadians.
At the same time in 1992, Ordinary Share Dividends paid by Corporations out of profits subject to taxation, were deemed non-taxable on the basis – if you can believe the double think here – that charging tax on profits and on dividends paid out of those profits amounted to double taxation. But charging National Insurance Tax as well as Income Tax on the same income so that you actually pay tax on the NIS contribution which you never receive, as well as charging income tax on the benefits and pension paid out of those contributions IS NOT DOUBLE TAXATION.
A worker having paid $26.10 in tax and NIS out of every $100.00 earned after the basic $26,000 ($2,166.67/month) which has gone on rent and food, every item you purchase with the remaining $73.90 will include an accumulation of import duties and levies, the 10% NRSL and 17.5% VAT. These increase the amount of tax you pay out of every dollar you earn.
Someone in this bracket to afford $100.00 in purchases will have to work for $192.40, of which NIS $19.43, I/Tax $30.78 leaving $142.19 to pay for goods worth $100.00+$10.00duties (a minimum) $11.00 NRSL and $21.18 VAT. In this example, the Government has collected $92.40, almost half of what you worked for, in various taxes and levies. On most items, the duties will be much higher, and this is for a person earning between $2,167 and $5,083/month. For those earning over $5,000/month, the take is 7.5% higher.
Corporation Tax, on the other hand, is assessed only on PROFITS. That is on income less all expenses that relate to the business of earning that income. It is the ONLY tax companies pay. Companies do not pay VAT, NRSL, or any of the other duties. These are all recovered from the customers as part of their Cost of Goods Sold or their Expenses, which are all deducted before tax is assessed.
Companies collect VAT on behalf of the Government. They DO NOT pay VAT. VAT on purchases is deducted from VAT on sales (which has been paid by the customer) and only the difference is paid over to the Revenue Authority. Companies not only collect the VAT from the customer, they get to keep all the VAT they paid out as compensation for their cost. Individuals pay $117.50 for an item – let’s say gas for your car. A company expenses $100.00 and keeps $17.50 from the VAT collected from the customer as a refund of the VAT they paid to the gas station. The $100.00 is then deducted from income and no Corporation Tax is paid on that.
The worker has to pay tax and NIS ($41.50) on the money he/she earned to buy that gas, plus the VAT $17.50 and any other taxes in the cost of the gas, which actually cost $159.00 ($117.50+41.50).
The Company pays absolutely no taxes on this purchase, recovers the cost of the expense from the mark-up on their sales and subtracts the expense from income, and the VAT from VAT collected; paying Corporation Tax only on the profit after deducting expenses and paying the excess VAT collected from the customer.
Once a company makes a profit, it is clear that ALL costs, including all taxes and levies have been recovered from customers, or there could be no profit left over. If they make a loss, which might include an element of taxation in the excess expenses, that loss will be deducted from future profits before charging tax, so the taxation will be recovered from future income and there will be NO DOUBLE TAXATION of any kind as there is with individuals who pay DOUBLE, TRIPLE, even QUADRUPLE Taxation on top of taxation, which leaves them with only a fraction of their earnings to support themselves and their families.
The ONLY Tax paid by companies is Corporation Tax on Profits. Profit is like the icing on the cake. Businesses get to deduct the entire cost of the cake (expenses) and pay tax only as a percentage of the icing. Whilst the Government takes 50% or more of the worker’s entire cake.
It is completely inequitable and unconscionable that corporation tax rates should be in any way similar to the rates on personal income. Income earned by people who get up to five/six days a week and make their way to work. Human beings who earn their living by expending their lives, hours, or days at a time which they cannot get back, developing high blood pressure, diabetes, or other chronic diseases by too little exercise, too much time sitting at work, damaging eye-sight, injuring backs lifting heavy loads, wearing down their bodies to pay the Government more than half of what they earn.
Between 2004-2007, corporation tax rates were reduced from 40% to merely 25% of profits, below the rate (33.5% or 26.1% (I/Tax +NIS) charged on Employment Income. Earlier Taxation Policy respected the personal effort of the worker in earning their income and taxed unearned income (e.g. Corporate Profits, Interest, Rental income – income which results from the investment of excess capital rather than personal toil) at higher rates.
Current Taxation Policy, implemented by successive Barbadian governments over the past twenty-five years, following the dictates of the American Right-wing (Rich-wing), developed on the advice of the Powell Memorandum and imposed by the IMF, rewards wealth over work.
If Barbados is to progress further in its development, there must be a re-balancing of the tax burden to ensure that the working population retains a reasonable proportion of its income and the costs of running the country are shared more fairly by those who can most afford to pay.
This is the second in a series of articles designed to examine changes in taxation policy in Barbados over the last twenty-five years. I wish to stimulate a conversation about tax policy, which will lead to new, innovative thinking, creating a more equitable tax system, which benefits the country and its people as a whole and not just a limited segment of the population.
My earlier article “Murdonomics is Killing us” can be located by a search of the title on the internet. It was published by Barbados TODAY on August 9th 2017.