Taxation changes

Two reports by working committees of the Malta Council for Economic and Social Development referred to the taxation regime in Malta. One recommended that taxation on corporations should be lowered from 35 per cent to 25 per cent and, to obtain tax neutrality, a property tax be introduced. The other discovered that taxation "is rather low by European standards" as Malta ranks 22nd in a tax table of EU member countries.

It is understandable that there should be a shift in tax incidence to ensure economic growth, i.e. charge lower taxes on the sectors that are capable of investing more. The second finding, i.e. that we are one of the least taxed countries within the EU, would lead an economist to conclude that we are a nation of high investment levels - which is not Malta's case; in fact, capital projects were sacrificed because of lack of financial resources. The same cannot be said of Ireland that used fiscal measures to expand its economy and succeeded in achieving high growth levels.

It is presumed that this finding has been qualified in many ways; the absolute summation of direct and indirect taxation with the amount of social security contributions as a percentage of GDP is not really a good indicator of the taxation regime structure but only of the actual amount of taxes collected from the three areas indicated. Revenue collected from taxation depends upon a number of factors, primary of which are: the stage of economic development, proportional composition of the economic agents and cost of living within the 25 EU countries. A country with high unemployment levels, one that still verges on the developing stage and one with rampant tax evasion will feature with relatively paltry tax payments.

Given Malta's present financial predicaments it is not surprising that the Prime Minister came out against the first idea. The second idea is conducive to encourage further taxation measures and the government may look favourably upon the second report as a pretext to introduce further taxation.

It should be observed that many of the constituted bodies sitting on the same sub-committee that prepared the second report came strongly against the idea of further taxation, indirectly implying that they do not totally agree that Malta is one of the least taxed countries in the EU.

The GWU explicitly stated that workers are already carrying a relatively high burden of taxation and distinguished between direct and indirect taxation. As the latter are regressive, the union preferred the former. The FOI referred to fees, not taxes, which are imposed by public authorities, and another two organisations declared that the government already absorbs a considerable amount of personal and corporate income through taxation.

The GRTU, instead of basing its conclusion on the concept of tax neutrality, is arguing that the highest tax rate should be reduced from 35 per cent to 30 per cent.

The idea is that corporate bodies and high earners, with higher profit/saving propensities, can invest more, thus contributing to economic growth.

This argument makes sense. Only those people who can make profits and invest can generate more national wealth and create more employment opportunities in the process.

This statement needs qualification. If profits are made from increased consumption levels of goods that have a high import content one has to be extremely careful. Malta has to pay for its importation with foreign currency and the possibility exists that our country would be draining its financial resources if importation of consumption goods rises substantially.

A better solution would be that importers of industrial/capital goods and exporters are given preferential treatment because these are the people and the sectors that help the economy to grow and provide employment opportunities.