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
