Taxation is an issue that is always likely to generate emotional discussions. This is because it is seen by some as a just way of redistributing income from higher income earners to lower income earners, while it is seen by others as a way of discouraging effort and entrepreneurship (while encouraging idleness), two factors that lead to wealth creation.

Both views may be justified on different grounds but both views can equally lead to decisions that can have a disastrous effect on the economy and society at large in the long run.

Moreover, the fact that no one likes paying tax, especially when other persons do not pay all the tax they are due to pay and when some of the money that we pay in tax goes to waste, makes all the debate so emotional. The issue is becoming topical because now is the time when the government will take the final decisions on how to raise revenue during 2006, that would be sufficient to pay for public sector expenditure.

However, the manner in which the revenue will be raised can have a very profound effect on the economy - hence the importance of a tax policy. The debate going on about a flat rate of tax continues to focus our attention of the issue.

On tax issues any government is torn between two conflicting views. The first is that we should have a progressive rate of taxation, whereby the higher the income the higher the percentage one pays in tax, to enable the government to redistribute income among those who earn less or earn no income at all.

The second view is that we should have a regressive rate of taxation in order to encourage persons to work harder and earn more, because this creates further wealth in the economy. Proponents of this view believe that a regressive rate of taxation would tend to inhibit economic growth and, in any case, economic growth would provide low income earners the means to boost their income. The flat tax - or, as is traditionally known, a proportional rate of tax - could be seen as a balance between diametrically opposing views.

The issue is complicated further because of the other two conflicting views that we have on taxation: Should we place emphasis on indirect taxation or should we place emphasis on direct taxation? Direct taxation is taxation on income, while indirect taxation is taxation on expenditure.

Taxation on expenditure is sometimes seen as a regressive tax. However, this is not a correct viewpoint as it all depends on the nature of consumption that is taxed. For example, in Malta there is no VAT charged on food and this means that lower income earners would be paying no VAT on that item of expenditure on which they spend most money.

To complicate matters even further, the government also raises revenue from charges it makes for the use of some of its services and from licences that are required to undertake certain activities. This gives flexibility to the government to use either of these two means instead of taxation.

Again, the indiscriminate use of such charges and licence fees can impact low-income earners more negatively, while a judicious use of them may seek to levy charges on ostentatious consumption or on services related to the consumption of luxury goods.

Any government in Malta has always sought to achieve what it considered to be a just distribution of income while not hindering economic activities through taxation and other means of raising revenue. Obviously, at times the balance tilted one way and at times it tilted the other way. This is, after all, the essence of fiscal policy. The snag is that today a number of other issues come into play.

Governments are now being forced to create a balance not only between social justice (we can include health and education in a wider definition of social justice) and economic growth, as they have to take account of issues like the environment and the promotion of one type of economic activity instead of another. Even when we speak of direct taxation, the government has to decide whether to place more emphasis on taxing wages and salaries or taxing business profits. It also needs to decide on what tax to charge on capital gains, especially those resulting from speculative activities, rather than investment activities that create wealth.

These various aspects take on a more significant dimension when one includes, among the criteria that one has in determining how the government is to raise its revenue, the need to reduce tax evasion and the simplicity of the tax collection system. Our Maltese experience has taught us that it is still next to impossible to make self-employed persons pay all the tax due (this is why middle-class salaried employees feel they have been short changed by the government in the last years when it focussed its tax collection efforts on them).

It has also taught us that the more complex the system is, the less is the amount of tax collected.

I believe that, with the current tax regime, the government can still collect more tax revenues if it attacks tax evasion. However, we also need to be more creative and design taxation rules that penalise those who harm the environment, who use up scarce and/or expensive resources like water and electricity to a greater extent than necessary, who consume luxurious goods, who indulge themselves in ostentatious consumption, in addition to forcing the self-employed to paying some of the tax due by them.

In effect, none of these measures can be considered as socially unjust and, more so, none of them can be seen as harmful to economic growth, thereby reconciling the two conflicting views we started off with. However, the design of new taxation rules requires less emotion and more rational thinking - social partners please note!

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.