The National Statistics Office recently published a very interesting news release on tax revenues in 2004, analysing the tax take in various different ways and included a comparison of tax as a percentage of GDP in different EU member states.
The NSO has over the last number of years been upgrading its services, not only widening the scope of their statistics but also publishing them in a very timely manner. The NSO today bears no relation to the Statistics Office of old whose output was often of great historical but of very little current significance.
National statistics cover most of the important aspects of the economy and are published in a relatively short time, mindful of the inherent danger and unfairness of having measured the nation's pulse and then making privy to it only the few.
I have not done a detailed study about this but it seems to me that revisions made to already published statistics are also getting smaller and more in line with what one would expect and with international norms. In the past we have seen some heavy revisions, often coming with uncanny timing.
Most of this work has been carried by Alfred Camilleri and his very dedicated team at the NSO. They not only produce the reports but take the time to explain them, and the statistical process, in the media. They produced some very good work.
Tax is important because it cuts into our pockets and this fact allows policy makers to change our behaviour by changing taxation. Tax is also important because it makes possible much of the "free" government services we see around us: education, health, police, roads, the courts of law, etc. In Malta, tax makes up 79 per cent of total government revenue.
Tax is intimately bound with democracy. It is said that there should be "no taxation without representation" and it is also said that taxation should be fair because otherwise it would be rejected by the people, along with the government that imposed it.
Gaining people's acceptance for taxation as we know it today was no easy matter even if people have been taxed, one way or the other, since the beginning of time.
Under the feudal system there was little need for formal taxation because it was inbuilt into the system, as it is under communism and fascism. It is the industrial age and markets, a higher degree of economic freedom and the eternally thirsty social model which led to our present system of direct and indirect taxes and other social contributions.
There is always a struggle against the introduction of a new tax. Indeed, political parties stand to loose the next election if they introduce new taxes. New taxes are first introduced small and fair, so that they are at their most palatable, but eventually tend to become huge and awkward, necessitating some heavy pruning, in a bid to resuscitate the much maligned golden goose. There are invariably spins going around, such as the one I kept hearing earlier this year about only a few hundred self-employed declaring more than some Lm10,000 in income. I think it started from a question in Parliament.
Someone hearing this would obviously think that tax evasion is rampant and that the self-employed are getting off without paying tax. The spin reflected our sort of anti-business culture.
I asked a journalist who was among those who innocently propagated the spin whether he knew many self-employed who earn more than Lm10,000 or Lm15,000 and who have not formed a limited liability company. He answered in the negative and told me he was under the impression that most business is carried out via companies.
I then asked whether the figure he cited included declarations by companies! He smacked his brow when he realised what a great spin it was. He promised to study the matter and run a correction - but that's months ago and so I am now doing it myself.
So now let us leave the spin and look at the statistics reported by the NSO. They state that, in 2004, of the Lm226 million collected in direct taxes, Lm78 million were paid by companies! That is 34 per cent. This apart from all the individual self-employed businesses whose tax is aggregated under "personal income tax", the Lm57 million in employer's social contributions, the Lm13 million in self-employed (and non-employed) social contributions and those portions of import duties (Lm8 million) and VAT (Lm140 million) paid in respect of goods which are still in stock or unpaid for and which business has to finance.
Business is also paying wages and salaries to its employees which, in turn, is channelled via FSS, VAT and social contributions back to government revenue and public sector employees.
When one considers these figures, the impression given via the repeat in the media of the original spin tends to start unspinning rather rapidly and it helps, every now and then, in a modest manner, to put things in perspective and to realise who is buttering whose bread. It should at least make for better economic planning and better care of the private sector by the public sector, unions and other institutions.
Another interesting thing is that the sources of the Lm638 million in tax revenues in Malta are rather well balanced: 35 per cent comes from direct taxes, 45 per cent from indirect taxes and 20 per cent from social contributions primarily related to employment. This balance is very important both to spread the burden and to avoid dampening incentives.
In Malta, the tax take is 35 per cent of gross domestic product (GDP), up from 29 per cent in 2000. During this period, GDP grew from Lm1.7 billion to Lm1.8 billion, or six per cent, while tax revenues grew from Lm480 million to Lm638 million, that is by 33 per cent. The slowest increase was in social contributions and the highest in direct taxes, which increased by 44 per cent. Of these, corporate income tax increased by 57 per cent. And that's not the peak. The peak was in 2003. Between 2000 and 2003, corporate income tax increased by 69 per cent.
The comparison with other countries in the EU is very interesting. Data is incomplete for 2004, so we have to look at 2003. We paid 33 per cent of GDP in taxes, which is below the EU average. The highest burden was predictably carried by the Swedes, who paid 50 per cent of GDP, while the lowest payers were the Lithuanians who paid 28 per cent. The Irish paid 29 per cent. Those who think we ought to pay more because we are below the average have to consider two things.
First, while we seem to be super-efficient in collecting taxes (and preparing statistics), what we have to focus on is on how the money is spent.
People do not mind paying high taxes if they get good services in return. They have to pay anyhow if they want to get anything. What they mind is paying without receiving. Good public administration is one of our big challenges. Inefficient public operations are the main argument in favour of privatisation.
Second, the trend today is for EU governments to try and reduce the tax rates in order to attract businesses from both outside and inside EU borders. Court decisions in this regard seem to be going in the right direction, encouraging tax competition between member states.
Marks and Spencer, the UK retailer, was last week awarded a decision in which the European Court of Justice ruled that the UK government had infringed EU law by refusing to allow tax losses from overseas subsidiaries to be offset against UK profits. In another case, Cadbury Schweppes is seeking to avert so-called "controlled foreign company" legislation which make it possible for the UK government to tax profit earned by Cadbury's subsidiaries in low-tax Ireland.
More and more within the EU, business - the golden goose - has to be earned by a low tax rate and a stable tax regime.
Market View will return in January 2006.
Mr Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking. This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such.