Dear Editor,
It is pleasing to read that the Private Sector Commission, the Alliance for Change and the Government support the concept of retaining VAT at its current level to effect income tax reform. They may not agree on the details but acknowledging needed income tax reduction is a necessary first step.
This is so because income, including wages and salaries, is a component of production, and thus a tax on income is a tax on production. Such a penalty makes production less competitive at a time when duty constraints are being removed from regional and international markets.
Economists therefore take the position that it is preferable to penalize consumption rather than income. Further, there is no economic support for the position that high consumption taxes reduce market demand. Government expenditures as well as expenditures from the private sector are components of GDP. Actually, government expends a larger portion of its revenues than the private sector because a portion of the latter is retained as savings.
The reform as outlined by the President whereby the income tax threshold is increased to $35,000 and the Old Age Pension and Public Assistance remittances raised may not be the priorities of an economist, but it is a start.
The government should recognize that the process should not stop here but be continued over a period of say, ten years, for impact mitigation reasons. To this end, some useful information was provided by the President. For every $1,000 increase in the income tax threshold, the government loses $425 million and for a 2% reduction in VAT, it loses $3 billion in revenues.
Assuming symmetry, then a 1% increase in VAT would allow a $3,500 increase in the threshold. An increase in the VAT rate of 1% per annum over the next ten years would provide $15 billion in additional government revenues for further tax reform including increasing the income tax threshold, reducing both income and corporate tax rates, eliminating the Property Tax, providing tax exemptions based on the size of the family, and exempting interest payments from taxation (if interest receipts are taxable, then interest payments should not be taxed). Of course this process can be speeded up with potential revenues from hydrocarbon discoveries and the carbon credits from maintaining the country’s standing forests.
Tax reform should not be seen simply as a solution to mopping up excess VAT revenues but as necessary for sustainable growth in the economy by attracting investors and creating a competitive market place for their output. Unfortunately, it is not practical to accomplish all of it at once and a phased-in approach is advisable.
Such reform will expand the country’s production base and create employment, obvious macroeconomic objectives.
Yours faithfully,
Louis Holder
