The Chamber of Small and Medium Enterprises, GRTU, intends to make a strong case to convince the government that a reduction in the maximum income tax rate would ultimately yield more benefits.
The proposal to trim the tax rate from 35 to 30 per cent is one of a number of suggestions being discussed among the social partners within the Malta Council for Economic and Social Development.
The reduction would cut revenue by Lm10 million but GRTU director general Vince Farrugia believes the government could more than make up for this shortfall by curbing expenditure and tapping other sources of revenue.
Prime Minister Lawrence Gonzi last month effectively ruled out any lowering in the income tax rate in the coming budget though he stressed he would be willing to discuss any suggestions made by the social partners.
Mr Farrugia said the "motors" of the economy - the middle earners - were among the highest taxed in Europe, especially since the maximum 35 per cent income tax rate came into effect at a low threshold (once income exceeded Lm6,751).
A report prepared by an MCESD working committee says that the Maltese tax burden, measured as the sum of direct taxes, indirect taxes and social security contributions as a percentage of GDP, is low by European standards.
But Mr Farrugia said it was about time that new layers of taxation were introduced since the existing rates did not provide any incentive for the middle sector to perform. "It's an essential sector to close up the deficit. A Lm1 coin would yield more benefits if it were in the businessman's pocket than in the government's."
Describing the government's economic policy as "misdirected" since 1994, Mr Farrugia claimed that the deficit would spiral to 101 per cent of GDP by 2012 unless immediate corrective action was taken.
He estimated that the economy needed to grow at a rate of four per cent over the space of four years to start recovering.
"We need to come to an agreement where public expenditure has to be curbed - at whatever price!" he said. Public expenditure has risen from 38 per cent of GDP in 1992 to 45 per cent in 2003.
Mr Farrugia said the government was still riddled by bureaucracy while ignoring the market forces that really mattered. Essential sectors like tourism and the export industry were not given the necessary impetus to contribute to the economy.
Economist and former MCESD chairman Edward Scicluna was cautious about any proposal to reduce taxes.
When contacted, he underlined the need to link the income tax rate issue to the financial situation in the country. It was essential to curb or reduce public expenditure before tampering with income tax. "At least we're realising now that a crisis has been brewing and it is spiralling out of control," he said.
Prof. Scicluna said there were various ways of controlling expenditure, ranging from raising efficiency in the public sector to the revision of clearly unsustainable public schemes in the education, health and social security sectors.
A reduction of five per cent in income tax, as was being proposed by the GRTU, had to be tagged to a clear programme of cuts in expenditure.
Though the reduction in the maximum income tax in the 1990s had initially trimmed tax evasion, Prof. Scicluna recalled that the move did not ultimately boost revenue and nor did it solve any of the fiscal problems.
"What we need to do is put our heads together and restructure our whole expenditure package to ensure that expenditure grows some two or three percentage points below the GDP's nominal growth. Only then can we aspire to a lower tax burden."