Taxing boomerangs, chicks and hostages

Through its plans to exact a carefully termed 'eco-contribution', the government has contributed fresh fuel to the controversies endemic to this blessed island. The contribution, like any payment due to the government other than a fee or a fine, is technically, and in many cases where it will be levied, specifically a tax. Just as a rose by any other name would smell as sweet, a tax by any name stings the same.

Taxation, like food, has a very basic primary meaning. Food is intended not to leave the stomach empty. Otherwise hunger pains will develop, the body will weaken and be unable to function properly. In a more refined sense, food can be eaten according to a diet which addresses specific objectives, intended to make the body function better.

A balanced diet, nutritionists will tell you, should be the norm. If the body departs from its balance, as it does tend to do, either due to neglect by its owner, or because of induced factors, such as illness, the diet has to be adjusted to rebalance the body through added or decreased inputs of the required quality and quantity.

The basic aim of taxation is to generate revenue for use by those who represent the people and govern with the consent of the governed, such that the exchequer is full enough to provide the basic public goods needed by organised society. To safeguard national and personal security, provide health and education services, put in place an infrastructure that enables the economy to work, such as by transporting and communicating, and makes it possible for the citizenry to satisfy their individual needs - through a predictable supply of water and energy, as well as a road network, water and electricity in the home, a sewage system to connect to.

Taxation has other aims. In particular, to generate a surplus of revenue to finance a given outlay on social benefits in a spirit of mutuality. The Maltese language expresses the basics of that spirit, the tenets of social justice, more pithily than in English - those who do not have (can) make do with those who have. At that level one is in the safe realm of basic humanity and humaneness.

If a degree of ideology is brought in, taxation is used as a deliberate means of redistributing income and wealth - and not merely generating a surplus to distribute to those at the margin of society. Whether any ideology has remained alive or not, not least due to convergence by the Left and right on social objectives, though by no means to a completely uniform position, in modern times taxation has become both a tool of economic management, as well as a mechanism for a better society brought about by an improved environment.

In terms of economic management some 70 years ago there began the Keynesian revolution of economic thought, aimed to address, like special diets, imbalances in the economic system, or disequilibria. At its simplest the theory of John Maynard Keynes seems to depart from fiscal rectitude, which posits a balanced budget, to deliberate creation of a budgetary deficit, or at least a reduction in the budgetary surplus, at times when demand is weak relative to the available and potential supply. A government, by reducing the tax burden, allows money to stay in the economy to create and finance demand.

More specifically, by creating a deficit, Government pumps money in the economy, which, allowing for leakages, such as into imports, stimulates economic activity through spending, which in theory can end up generating additional taxation to finance the original deficit.

The clearest imagery of the theory is that, at times of weak demand, it is better to employ people to dig holes, only to fill them up again, rather than leaving them unemployed, since they would thereby receive wages which they go on to spend, and so the circular flow runs and runs.

Sophisticated discussion, alternative theories and at times actual experience challenged Keynesian economics. They did not completely undermine the fundamental theory, though our own case is sharp evidence that fiscal deficits do not miraculously fashion a strong economy. If deficits equated progress, we would be one of the most advanced economies around.

A more refined part of the tool kit of partial management of the economy through taxation is its effect on the incentive to work. Conservatives as well as liberals who instinctively oppose government intervention warn that taxation is a disincentive to effort. Carried to the extreme, as it so often has been and continues to be, that warning is an excuse for fiscal immorality - tax evasion by those who are able to escape sanctions.

Aside from extreme thinking that insidiously encourages evasion, it is believed that too high a level of direct taxation can be a disincentive to work, and a spur to operators to move into the underground economy, even were they to start off doing so reluctantly. Good economic management, therefore, requires a level of direct taxation that leaves enough in the hands of companies and individuals to make it worth their while to continue to work, as they will have an acceptable after-tax balance to spend on new investment (companies) and consumption (individuals).

In a more active sense, taxation - apart from not being allowed to become a disincentive to effort - can be deployed as an incentive targeting particular activities and operations. The Business Act in force in Malta, for instance, aims to do that, as has legislation that preceded it. An example in the personal sector is the flat rate on a given level of income from part-time work, irrespective of the individual's marginal rate of tax (the current example is 15 per cent against a potential maximum of 35 per cent).

Using taxation as a mechanism for a better society brought about by an improved environment seems to be more complicated to understand, and to accept. It need not be so if one departs from the standpoint that taxation, like all public regulation, should not be a punitive mechanism, but rather one that offers the reward of a better society for all.

The warning that those who litter public places will be fined is a deterrent to unsocial behaviour. If the deterrent works, everyone is better off. If any egoist betrays society through social disregard, and is caught, a fine is levied, and a lesson taught. Other examples may be seen in speed limits, regulations on the time up to which music may be played in public, and the noise level.

A harder example is to be found in the polluter pays principle. Pollution is clear enough to understand when expressed as a capriciously deliberate wrongdoing, like littering, and shattering what relative calm there may be with the volume of music, unlikely to be rendered on the harp. When pollution is defined as the rubble and dust that construction creates, requiring the contractor to pay a fine or contribution, which he will no doubt pass on to his customer, resentment results, since one could easily feel that building and rubble and dust are inseparable.

There are more positive and better examples of this principle. But, in essence, they turn on the same penny - someone has to dig into his purse and pay up. Nobody likes doing that, whether in the name of a better society, or to finance expenditure on services required by society.

Our own society can hold its head high when it comes to helping others out voluntarily - the old recommendation that those who do not have (can) make do with those who have is admirably accepted and acted upon. When it comes to reluctance to make any payment, in the form of whatever direct or indirect tax, fine or fee, and in seeking out ways to avoid or evade doing so, we are, arguably, also second to none.

It takes time and education to change an attitude that is deeply ingrained in our culture, on top of what exists in human nature. It would also help, however, if the political class reviewed and revised the manner in which it talks and acts about taxation.

Take the Opposition first. I use the term in reference to the parties that have been in Opposition through time, striving for their turn to be top dogs. Criticism on tax matters from the Opposition target any aspect of them that comes up from time to time.

It has taken us nearly seven decades to come to some sort of broad agreement on a basic tax structure - as distinct from the rates applied under it. When the first Labour government moved to introduce income tax, six decades ago, the Nationalist Opposition fought tooth and nail to stop it. All sorts of remarkable arguments were thrown up. Even the Curia intervened.

One of the earliest bits of political oral history I came across in my early life in politics had it that Archbishop Michael Gonzi threatened the Labour Cabinet with moral sanctions if it dared introduce income tax at more than a certain rate.

When the Labour government of the Seventies and Eighties upped the social security contribution (then known as the National Insurance stamp), the Nationalist Opposition likened the rate to a cannonball. I dislike the growing practice of introducing Maltese phrases in columns written in the English language, but there is no English equivalent that I know of to the bolla-balla charge spat out with regular disgust by the Nationalist Opposition.

When a Nationalist government moved to restructure the indirect tax system, basing it largely on the Value Added Tax, the Labour Opposition, with this columnist in a starring role, tried to blast the effort to smithereens.

The foolishness and shortsightedness of Opposition parties was brutally exposed when the hostages they gave to fortune in the above three examples came to be redeemed. Successive Nationalist governments retained the income tax mechanism. John Dalli, to his net credit, the debit being the way he shoved bands and minimums and maximums about, streamlined the tax into an efficient revenue-raising mechanism, even if there is more to be done to attack evasion.

Also, not only did Nationalist governments not defuse the bolla-balla by reducing the social security contribution rate as the logical conclusion to their criticism from the Opposition benches - they raised it twice, to its current 10 per cent level.

On its part Labour too paid the expected price for its total attack on VAT when in Opposition. That price is suggested by some to be expressed in the fact that I discarded the finance portfolio and left the Labour Cabinet in 1997. That was hardly.

No individual politician has that high a tag, if any at all. The currency of politics is credibility. Labour's price was paid in that currency. It came round to accepting VAT. Its leadership attributed the change to its electoral defeat, claiming it was too late to remove the tax.

The loss of credibility in that, as in the case of acceptance of EU membership, lay in the fact that the Labour leadership had turned VAT into a theological issue, a matter of fundamental principle. When principles change for electoral gain, credibility, which is the antithesis of opportunism, rushes away. The sad fact is that it was never a matter of principle, in the same way that EU membership or staying out was a political and economic choice, and should have been presented as such.

Shortsightedness shown by parties in Opposition regarding taxes is manifested also in how they invariably attack the level (technically called the burden) of taxation, irrespective of the fiscal framework. When I presented the Labour Budget for 1997 and, in a weak start to tackle the structural deficit built up by the Nationalists, proposed to increase some taxation, and also to reduce the allocation to local councils, the Nationalist Opposition yelled blue murder.

They did so on top of shamefully denying responsibility for the massive structural deficit they had left behind, rather than trying to explain it. They persistently claimed, every single day of that Labour government's short life, that the Labour administration was massively increasing the tax burden.

Back in office, the Nationalists duly increased the tax take and have committed themselves - with good reason - to the EU to do so further. The public was also told in mid-week that the government will be cutting back on funds to be voted to local councils.

Boomerangs have rarely returned with grimmer prediction. But was any lesson drawn by the Labour side? It would not appear so. The Labour leadership in particular keeps firing the charge that the Nationalists have increased the tax burden beyond endurance, and the Labour leader has given a personal guarantee not to increase taxes should Labour be returned at the next election, as they must be unless there is some new combination of massive ineptness and abysmal loss of credibility.

It is natural enough for Labour to reply with tit for the Nationalists' tat when in Opposition. But the way the charge is fired commits the party to the logical conclusion that a future Labour government will not increase the tax burden. No party can make such a commitment, truly and honestly.

The tax burden will continue to rise in absolute terms. If there is any hope at all of a reduction in the public debt, which will continue to rise as long as there is a budgetary deficit of as much as one brass farthing per annum, taxation will also have to rise as a proportion of the Gross Domestic Product. As for new taxation, only the unfolding future will determine whether that will be required, and when.

No one, not even if he were president of the Heavenly College of Prophets, can seriously and honestly undertake not to introduce any new taxation, whatever the circumstances and events bring about.

Taxation would fulfil its necessary role and purpose far better of politicians, of whatever hue, talk about it frankly, and plan it realistically. Boomerangs always come back. Chickens come home to roost. Hostages to fortune have to be redeemed. Whichever metaphor one picks, it can be summarised in a two-word message: Be serious.