COLUMN-To tax or not?
In an interview with Barbados TODAY last month, Minister of Finance Chris Sinckler made an important acknowledgement which, perhaps deliberately, was carefully worded. He said Barbados, “to some extent”, had reached “a saturation point” where taxation is concerned.
Saddled with a heavier tax burden in recent years as a result of new impositions and the withdrawal of certain allowances, Barbadians who read the interview probably interpreted the comment as a promise of no new taxes in the forthcoming Budget. They were mistaken.
The possibility of more taxes coming was raised not long afterwards. Reviewing the economy up to September, the Central Bank revealed that the national budget still showed a financing gap of $175 million that required attention if Government wished to achieve a key policy objective.
This objective is reducing the fiscal deficit to 6.6 per cent of gross domestic product (GDP) by the end of the current financial year on March 31, 2015, down from 12 per cent last year, in line with the Government’s 19-month, self-imposed adjustment programme.
Noting there was a certain level of revenue Government had to achieve for this to become a reality, Sinckler confirmed at a subsequent news conference the inevitability of more taxes. He put it this way: “It is not our contemplation for any major increases in taxes.”
He went on: “In fact, we may very well be looking over the short to medium term to broaden the bases to reduce some of the incidence of tax on Barbadians.”
Meanwhile, Barbadians can expect some increases on a relatively small scale.
To avoid surprises and disappointments, it pays to listen carefully to the words used by politicians to extract exactly what they mean. Without doing so, persons can arrive at the wrong conclusions based on what they believe was said, instead of what was actually said.
Sinckler did not mislead the country on this issue, as an email writer tried to convince me this past week. To be fair, the operative words he used in the interview were “to some extent” which mean “partly”. It would have been different, however, had the operative words been “to a full extent”.
The much anticipated Budget, expected over the coming month, will reveal how much more taxation Government thinks is appropriate as it considers recommendations, some controversial, from the International Monetary Fund (IMF) for sweeping changes to the tax system.
The consensus among Barbadians is that they cannot take more taxation at this time. What is desirable is tax relief which would increase disposable income, especially in the case of individuals, for either investment or spending on goods and services that would contribute to economic growth, which must be the primary national objective.
While additional taxation can help to achieve the deficit reduction target if projected revenue yields are realized, it is also likely to contribute to further stagnation of the economy which can defeat the purpose. Barbados’ recent experience shows that more taxes do not always translate into higher revenue yields in the context of a stagnating economy.
It is clear that under successive administrations a “tax and spend” culture was allowed to develop within Government. Whenever new financing was required to meet the needs of public expenditure, the taxpayer –– both corporate and individual –– was seen as a ready source.
Habits are hard to break, but this culture must be changed. What Government ought to be focusing on –– and it is an issue which so far has not received much attention in the current debate on the economy –– is improving efficiency.
Improving efficiency should be aimed at ensuring maximum value is achieved on every tax dollar spent and eliminating the kind of wastage repeatedly mentioned in the annual reports of the Auditor General.
Considerable savings can be achieved this way and would reduce the need for the current level of taxation. If the issue of Government efficiency is not simultaneously addressed in the context of tax reform, eventually the country will be back at square one.
Over the years, Government has become a bit unwieldy and needs to be downsized to lower operating costs. However, downsizing does not have to be only a dreaded policy of retrenching workers if it is seen as an opportunity, in some cases, for empowering the said workers through facilitating entrepreneurship.
There are some Government activities that can be performed more efficiently by the private sector.
More taxation is also likely to stifle productivity, especially at the individual level, at a time when Government has identified higher productivity as essential for economic growth. Any time people feel that they are toiling more for the benefit of Government than themselves, it kills the incentive to be more productive.
There is evidence that Barbadians have felt this way for some time. There are some persons who refuse to work overtime because they say it is of little benefit to them because of the level of tax deductions. Similarly, there are Barbadians who deliberately work for a limited time every year.
If I were a Government policymaker at the political level, I would seriously explore the possibility of eventually abolishing income tax and placing emphasis instead on a higher Value Added Tax (VAT) –– maybe 18 to 20 per cent.
As it stands, persons in formal employment are the ones carrying the income tax burden, while a large number of persons working in the informal sector go free. A question of fairness does arise.
Besides, I have worked in a jurisdiction where there is no income tax and have witnessed people toiling beyond the call of duty because they saw themselves as the primary beneficiary. People are motivated by self-interest and will push themselves beyond the limit once they see the benefits.
I also remember the days, as a young journalist, when Antigua and Barbuda had no income tax. The economy was buoyant. I knew people who held two jobs. They worked during the day, a portion of the night and never complained. They were doing it for themselves.
It is not an easy task, but striking a balance is needed, in the present pursuit of tax reform, to create a win-win situation for both Government and the Barbadian taxpayer.
(Reudon Eversley is a Canadian-trained political strategist, strategic communication specialist and journalist. Email firstname.lastname@example.org)