GRTU proposal dismissed as big revenue loser

The revision of the income tax bands proposed by the Chamber for Small and Medium Enterprises (GRTU) would result in a reduction of tax revenue for the government of around Lm44 million, the parliamentary secretary within the Finance Ministry Tonio Fenech said.

The GRTU last week proposed a revision which would have raised the exempt threshold to Lm5,000 for single declarations and Lm7,000 for married, while also raising the other bands by a few thousand liri.

Dr Fenech said the government collects Lm82 million from employment income and an additional Lm500,000 from the self-employed.

"The bands would reduce the tax from the employed to Lm38.6 million, a reduction of Lm43.4 million. Where else could we raise this money?" he said, shaking his head.

"I would appeal to the constituted bodies to do a bit more homework before they come up with these sort of recommendations."

Dr Fenech disputed the argument that money not deducted as income tax would become disposable income to boost economic growth.

"One of the arguments is that the government would then collect Vat on the money spent. Well, imagine all the Lm43 million were spent, I would get 18 per cent of that (Lm7.7 million).

"Now, bear in mind that much of the money would be spent on imported goods. So let us say that Lm30 million is spent in the local economy. What would the multiplier effect be of that spending? Would it be enough to make up for the loss from income tax? It might in the longer term, but certainly not immediately, and we have a deficit problem that we need to address."

Dr Fenech said the government would not attempt to reform taxes without first carrying out a full review to see which income areas are being affected negatively by the tax system, and to see where to shift the burden of taxation.

The GRTU also proposed further privatisation, including that of St Luke's Hospital.

"I would still have to pay for the service provided - assuming that the GRTU means a public-private partnership. If not, then are they proposing that health care should be privatised? If we agree as a country to do that, well, I would save Lm80 million a year, but I don't think we are ready for this."

He was also not entirely convinced that there would be enough cost savings from a PPP to justify major tax band revisions.

"There could be. But St Luke's is the only major service provider in the country. Although there are some smaller private hospitals, you would be creating a monopoly in the private sector, in the sensitive area of care," he said, adding that it would mean an entire switch to private insurance.

"I do not believe that the country is willing to go down that route."

He had also done a few calculations on the exempt band. Given that statistics show 15 per cent of households at risk of poverty, would this not be a socially just measure?

"This is a simplistic argument, as it does not follow through the argument to its consequences. We recognise that there is a poverty line and that no tax should be collected over that poverty line. But the reality is that we have a very generous social welfare system that we have to finance. We can either reduce social welfare or reduce taxation. There are no two ways about it.

"I am not saying that we are not going to review taxation. We have said that we will not review it in this budget, so do not hold out any hopes for something soon. We intend to set up a task force that will review the whole tax system to ensure that it is best suited to what we need as a country to remain competitive, not to discourage people from going to work, and so on. Raising the tax bands might be the conclusion, but we first have to work through a number of options and their consequences."

He was also frustrated at having to explain yet again the company tax regime, saying that the maximum rate of 35 per cent was rarely paid; as a result of investment incentives and other rebates, few companies paid more than 20 per cent, he said.

"Our rates may seem comparably high at first glance, but when you look at the mechanisms that are applied, they are low."

He said that the flat rate tax system, as being proposed by the Malta Employers' Association, may mean people would pay more than they do now.

"These are complex issues. Whoever tackles it needs to build up a model incorporating the real economic growth forecast from the reform, to see the real revenue that tax cuts would generate."

One point made by the GRTU struck a sore point with Dr Fenech: That people are investing in property rather than in their businesses.

"That is a concern, especially since the consistent rise in property prices is making it such an attractive investment. This is also discouraging people from taking risks associated with investments like opening a shop or a business.

"We recognise this and this is why in the pre-budget document we mention specific concepts, like incentives for those who employ others," he said.

Alternattiva Demokratika also suggested a tax on property, but even that would have the consequence of people investing overseas.

"Property speculators will not decide to go into manufacturing... They would simply take their money and buy islands in Croatia. That is the present trend."

Dr Fenech also commented on AD's proposal to have higher Vat rates for luxury goods and lower ones for certain categories. He said that the government had limited leeway when it came to Vat because there were EU rules on how many rates could be applied (two), and within what limits. As there is already a five per cent and 18 per cent rate in Malta, the government could therefore not introduce a luxury one.

Even if the government were to introduce a different tax on luxury goods, the same rule applied: Think it through to the consequences.

"We already said that we want to shift the burden of taxation from income and the generation of income to areas which harm the environment and which strain resources, and to purely luxury items.

"But take the proposal to tax yachts, for example. How can we on the one hand say that we want to promote a commercial yachting register to encourage foreigners to register their yachts here because there is a favourable tax regime... and then tax them!"

It all boils down to Newton's law: For any action there is an equal and opposite reaction.

"If we want to reduce our taxes, we first have to decide whether we really want to keep all our services free. And we - not as government but as the public - are not really ready to address this issue. Each time you raise the possibility, there is always a revolution."