Dear Editor,
I support the country’s Value Added Tax (VAT) vis-à-vis an income tax alternative because to the extent a tax is seen as a penalty, then VAT penalizes consumption while income tax impacts production thereby making the latter less competitive in an increasingly competitive world. In addition, the burden of income taxes falls disproportionately on the country’s working poor, whose wages are more discernable than the income of self-employed workers.
Notwithstanding this, proposals have been and continue to be made for a reduction in the VAT level. The rationale given for this reduction is that VAT is inflationary and it impacts the indigent members of society. Neither reason is satisfactorily supported.
While a tax on consumption will increase prices and therefore is inflationary, VAT, a consumption tax, replaced in the main another consumption tax. The effect of one consumption tax replacing another will have a zero effect on inflation. However, for reasons still to be determined, VAT revenues in 2007 were not neutral in relation to the consumption taxes VAT replaced, and exceeded those by about $12 billion or 7% of GDP. This, along with initial implementation problems such as prices reflecting both the replaced consumption taxes as well as VAT, contributed to the 2007 price inflation. The government countered by increasing government wages, reducing the income-tax threshold, providing additional support to the indigent and subsidizing the cost of fuel used in the generation of electricity, among other things. In other words, the surplus was used to reduce commodity prices (utility rates) and increase incomes. Although I don’t support price subsidization because of the distorting effect it has on demand, and would have preferred to have the entire VAT surplus used to reduce income taxes, the measures put in place nevertheless reduce prices and increase incomes. So ceteris paribus, Guyanese are better off in 2008 than they were in 2007 when surplus VAT was causing inflationary pressures. Since the rate of VAT was not increased in 2008, it could not contribute to the rate of inflation in 2008.
Will a reduction in the VAT level decrease inflation? That depends on what’s done to remain revenue neutral. If those proposing a decrease would remove the subsidy on utility prices, then a VAT rate reduction would have no effect on inflation. If the neutrality remedy is to increase income taxes correspondingly, prices will decrease, but by the amount of the decrease in incomes, and consumers would be no better or worse off. It is therefore important that advocates of a VAT rate reduction identify what government programmes they propose to change or how the lost revenues would be recovered, for a better understanding of the proposal and its consequences.
The impact on the poor from the implementation of VAT is an area that needs more study, but intuitively the effect seems very minor. That’s so because many necessities are either exempt from the tax or zero-rated. After the working poor pay housing rent, transportation, food and utility bills, all of which are either exempt or zero-rated, what discretionary income is left for purchases that attract VAT? Very little, I think. But more study is needed for a definitive pronouncement on this and the government should undertake to gather inflation trends by income brackets which will help it understand impacts from certain measures and thus be able to better design remedial programmes, if needed.
VAT is an important measure of tax reform in Guyana and those advocating its elimination or modification must identify what will take its place and how that replacement would impact certain cross-sections of society. Only then would we be able to seriously evaluate their merits.
Yours faithfully,
Louis Holder
A very well thought out letter.
As for a reduction of VAT leading to a reduction in prices:
When businesses put us prices they seldomly reduce these prices unless their competitors have reduced prices (ref: GT&T & Digicel competition).
When the VAT was removed from flour it lead to Namilco raising prices by 16% thereby not passing the reduction onto customers.
When the taxation was reduced on gasoline and diesel it did nothing to reduce the cost of transportation to the ordinary customer.
How about really enforcing the tax laws to makes sure all parties pay their full share of taxes.
Many, many wealthy individuals are not paying their fair share of taxes.
This is common knowledge and the GRA is privy to this information.
However, friends in high offices prevent and scuttle any efforts for enforcement.
Get real Holder.
Not even the arguments in the letter above can convince poor Guyanese that the VAT as currently constituted is not bad for them. Does the writer really believe that poor people will be distracted by the foolish argument that income tax, as opposed to VAT, is disproportionately paid by the poor? Does the writer believe that the poor don’t know that many of them don’t pay income taxes but that all of them must pay VAT, regardless of the number of their purchases that is subject to it?
Thus it is obvious that the writer is offering an untenable argument and comparison in support of keeping VAT at its current rate.
The argument about “lost revenues” is also irrelevant to this debate because the call for a reduction in VAT rates is aimed at easing the pressure on the poor. And it is unconscionable to argue that VAT revenue is being raised/used for the benefit of the poor, when it is being sourced from the poor, who can least afford to pay it.
The VAT rate ought to be reduced immediately in order to eliminate its negative effects upon the overwhelming majority of our people. It’s up to the government, not VAT’s critics, to figure out how to replace the so-called “lost revenues” that will result from a reduction in rates.
WHAT evidence does CARL in America have of VAT affecting the poor in Guyana?
NONE!
He obviously does not know how poor people live and what they do to survive.
As a guide: even though people were blaming the VAT@16% for price rises the recent USA medical mission to Linden found that there were no cases of malnutrition.
This is diffrent from what the PNC was saying with its VAT coffin.
As well as, people still found the monies to buy consumer products, like cel phones, as can be attested to by the long queues at teh variosu Digicel and GT&T outlets.
Afinam The answer to what you ask Carl is simple we only have to stop sending Barrels and Money to Guyana for a period of 6 months i am sure you will see what you are looking for . I hope your friends will be able to handle the pressure because the results will not be good.
AFINAM,
You are talking nonsense…how does carl know how the poor people are living in guyana, obviously he has family living in guyana and has visited them. Even if he doesn’t have family left in guyana, he must have visited and see first hand how the poor are struggling to make ends meet. I HAVE!!!
And as for being able to purchase a cell phone, some folks can still afford to do so…not the majority, for your information.
I agree that Afinam is being nonsensical.
A well thought out letter? Please!
Instead of asking how lost revenues would be recovered; Mr. Holder should propose how the windfall from the implementation of VAT should be repaid to taxpayers!
Don’t twist the story to make the current tax revenues the acceptable level when the Government touted VAT as being revenue neutral and now Guyana’s place on the list of countries having the highest tax to GDP ratios in the world has been firmed up!
Guys, thanks for pointing out the obvious folly in Afinam’s statements. I have sent thousands of dollars to Guyana over the years for my friends and relatives and have also visited. So I know what is going on in Guyana.
By the way, the government is enjoying a VAT feast off of the US$400 million in remittances that overseas Guyanese send to Guyana. But we then have to face these nonsensical statements from government sympathizers like Afinam, who has also blogged under the monikers Dravidian and Brignandan on other blogs.
Anyway, the VAT rate has to be reduced one way or another because hard economic times in the U.S. will definitely result in a reduction in remittances and a consequent decrease in disposable incomes available to the Guyanese masses.
The people should continue their marches/protests against the VAT until the government comes to its senses.
Oh your’re most welcome, Carl. Glad to be of help.