Pre-budget deliberations (2)

As already stated in the first part of this article published yesterday, it is imperative that our country strengthens its economic fundamentals in order to pave the way for the necessary growth.

Income tax and national insurance

The Chamber of Commerce and Enterprise feels reassured with the government's proposal to review "income bands applicable to personal income taxation, in order to extend the band of income which is taxed at a zero rate and to retard the onset of highest rate of tax".

Such a measure is deemed positive as it serves to encourage work and productivity. The argument runs that workers respond to lower marginal tax rates by expanding the hours they work and raising productivity. The measure will encourage households to save. Consequently, the potential output of the economy increases.

The income tax measure is also conducive towards economic expansion as it stimulates consumption due to the increased spending power of low and middle income earners. The latter are empirically proven to contribute most towards the generation of economic momentum through their contribution towards aggregate demand and private expenditure. It is for these reasons that the Chamber has long called for the fine tuning of the income tax parameters for individual taxpayers.

The pre-budget document presented statistics showing that "around 37 per cent of taxpayers in Malta are not subject to income tax because they declare an income within the zero tax bands. On the other hand, more than a fifth of taxpayers are subject to a tax bill in excess of Lm400 per annum." In the light of these facts, therefore, the Chamber believes that the review of tax bands should be implemented in a fair and balanced manner. The Chamber believes that more focus should be given on those who actually pay tax particularly at the highest rate.

While the Chamber applauds the government's commitment to shift taxation towards indirect rather than direct taxation, it is somewhat sceptical as to the effectiveness of these measures given the constraint of the Lm8 million limit on loss of revenue in order not to impinge on the government's plans for fiscal consolidation.

The Chamber is also pleased to note that the pre-budget document acknowledges that the minimum social security contributions that must be paid by employees earning a minimum wage tend to discourage people to work, particularly on a part-time basis. In fact, the current system tends to go against the principle of making work pay as workers must pay a significant proportion of their income in social security contributions. While it appears that the present system will not be changed, in order to encourage part-time work an option to apply for a proportionate system will be given should the income be at a lower level than the minimum contribution rates established.

Energy benefit

The Chamber noted the proposals in terms of the Energy Benefit and is encouraged by the fact that eligibility is based on three criteria: household income, household size and household consumption of water and electricity. The Chamber strongly insists that the measure taken immediately prior to the 2006 budget, whereby the cost of living adjustment reflecting the increases in the water and electricity rates was given across the board on an individual basis, is not to be repeated. The Chamber continues to state that such a measure is detrimental to the competitiveness of the private sector, particularly when the costs of fuel and electricity has already left its toll on business.

Airport taxes

The Chamber and, in particular, its Tourism and Leisure Economic Group, were pleased to note the government's proposal to cut the departure tax. In the pre-budget proposals, the Chamber reiterated its belief that the said tax already burdens the trade and if people choose to travel less it could also hinder Air Malta's plans to compete against low-cost airlines operating from Malta. Given that Malta is not part of mainland Europe the local business community is already disadvantaged. The departure tax is certainly an unnecessary added cost which export-oriented firms can do without particularly when they already incur high costs to tap new markets in order to export their products and services.

Married women working in family businesses

The Chamber pronounced itself in full agreement with the proposed measure to rectify the fiscal anomaly regarding the tax treatment of married women working in family self-employed businesses. This measure, complemented by the introduction of pro-rate national insurance payments, was perceived to have a threefold benefit by the Chamber. It would contribute towards introducing a fairer tax status for self-employed persons and their spouses, it will potentially increase national insurance receipts and, also importantly, encourage part-time and full-time activity by women in the labour market, effectively increasing the female participation rate.

Mr Galea is president of the Malta Chamber of Commerce & Enterprise

Tomorrow: Private Pension Schemes And Rent Law Reform