Economist Dr Clive Thomas says the Value Added Tax (VAT) was poorly timed and too high and is surprised that government has not yet seriously considered a reduction given the phenomenal yield of the tax as against the promise that had been made of it being revenue neutral.

Writing in his Sunday Stabroek column in June, Dr Thomas said: “The introduction of the VAT tax was a trigger mechanism leading to inflation, based on business expectations and the mark-up opportunities it created. In similar vein, if carefully crafted I would argue that a reduced VAT tax rate could lead to increased consumers expectations of a price fall, thereby putting the pressure back on businesses to reduce prices.”

According to Thomas, he has no doubt that the introduction of the VAT tax was very poorly timed.

Giving further evidence about the general inflationary impact of the VAT and Excise legislation and the resulting burden on the poor, Thomas said taxes in 2006 yielded a revenue of $59.6 billion. “These were budgeted to yield $60.9 billion in 2007 and ended up yielding $79.4 billion, a whopping increase of over 30 per cent on the 2006 total.”

He said that not surprisingly, taxes as a percent of GDP amounted to 39.3 per cent in 2006. “For that matter the tax ratio averaged 38.3 per cent over the previous five year period, 2002 – 2006. However, in 2007 the tax ratio jumped to 46.6 per cent. This is perhaps the most formidable direct evidence of the dramatically increased role that taxes were playing in national expenditure and the prices of goods and services which included them,” Thomas said.

He said too that in particular it was of the utmost significance that the tax increases were overwhelmingly concentrated on consumption and therefore burdened the poor most.

Thomas said that on a relative basis, taxes on income, while increased in 2007, only rose by 9.4 per cent over 2006.  Taxes on trade (mainly imports) rose by 38.9 per cent, he wrote. “The VAT however, exceeded all expectations, increasing by 58.2 per cent. Indeed the VAT tax was budgeted to yield $24.8 billion in 2007, just one billion dollars above the consumption taxes it replaced, but ended up yielding $36.7 billion!” Dr Thomas said.

He pointed out that government’s declared aim at the time of introducing legislation was to ensure that the new VAT and Excise taxes yielded enough revenue to compensate for the elimination of consumption taxes.

“This has been popularly interpreted in Guyana as ensuring “budget neutrality”. To my mind the government feared a shortfall in revenue and the results of the tax yield surprised them,” he noted.

Thomas said every Guyanese realises from his or her own daily living experience since the beginning of 2007 that the introduction of the VAT and excise legislation has precipitated much of the inflation in the price level that they have had to face ever since. “Nonetheless, with amazing stubbornness the Guyana Revenue Authority (GRA), GINA, other government spokespersons and technocrats employed by the state have sought to “prove” to Guyanese through the public media that the introduction of the VAT and excise tax should lead to a decline in prices and deflation, not rising prices and inflation,” he said.

He believes that businesses do not have to overtly collude or conspire to seek opportunities to look for higher profits and feels that instinctive knowledge of the price formation process in Guyana leads them to this result.

“Thus one cannot undertake an analysis of the effects of the VAT and excise tax on one business in a partial manner, assuming other things remain equal (the ceteris paribus condition). On the evidence, the tax has been a trigger mechanism for an all-round rise in prices,” Thomas said.

He pointed out that in a free market situation, enterprises cannot be prevented from acting in the manner described before. “Nothing done in the example cited here is illegal. This is indeed the nature of the capitalist free market economy and the laws, rules, regulations and procedures of the Guyanese economy permit such approaches,” Thomas said.

He said that it is therefore the responsibility of governments to moderate excesses. “However, to be able to do so, governments must first understand and thus anticipate untoward developments.”

According to Dr Thomas, every presentation to the Select Committee on the VAT and excise legislation had cautioned about the potential inflationary effects of the VAT. It was also pointed out that because the Guyana dollar was linked to the US dollar, which was at the time continuously depreciating in foreign exchange markets, this would aggravate the inflationary effect of the VAT as the prices of imported inputs to businesses would be rising.