Income tax is usually seen as a means to promote social justice by being a mechanism that enables the redistribution of income. For that purpose the tax is usually set on a progressive scale.
I have never seen the likes of this social obscenity from either party- Lino Spiteri
Low income is zero rated, then escalating rates kick in, usually starting from 10 or 15 per cent and ending at a higher scale. In Malta with the introduction of income tax in the late 1940s the maximum marginal rate was set at 65 per cent.
That high personal rate was hardly ever reached. At a time it was said that the highest number who paid it totalled 11. The rate was not only socially too high, but also inefficient. Since we do not have company tax in Malta, it favoured shareholders not to take dividends which introduced them into the tax band above 35 per cent and leaving profits above that level retained in the company.
To the extent that such profits were ploughed back to expand the firm productively, that was efficient. To the more likely extent that they became passive cash deposits, that was inefficient and encouraged distortion and abuse. Various administrations of both political hues left the 65 per cent notional marginal rate in place, it was later removed, after 1987, by George Bonello Dupuis, Finance Minister in the newly-elected Nationalist Administration.
Over the years the tax regime underwent various changes, the objective was to make it fairer, through a sensible progression, and to make it more efficient, through timely collection.
Efficiency was introduced by the Pay as You Earn system, later replaced and strengthened through the Final Settle-ments System. Tax bands and allowances were also changed. The latest change before the Budget for 2013 was presented left three rates in place, 15 per cent, 25 per cent and top rate of 35 per cent.
This made for smoothness but the rate of progression was not necessarily the best, neither in social terms, nor in economic terms since the 35 per cent marginal tax bites too early to discourage tax evasion, which remains rampant. What is known as the mini-max point scale was too short.
Before the election of 2008, the Nationalists came up with a proposal to widen the 25 per cent band massively such that the 35 per cent marginal rate would only bite on incomes in excess of €60,000, which is far above the median taxable income in Malta.
Consulted informally at the time, I opined that this was wrong. Firstly, it would upset progression even further. Secondly, it would cost too much. My first objection was ignored.
My second one was countered by an assurance the change would cost the government only €12 million in foregone income.
I remained sceptical. In any event the Government failed to fulfil its promise, which had also been buttressed by the argument that the cut would actually promote more economic activity.
In the election Budget presented last week the Finance Minister returned to redeem his 2008 promise, in three stages. Next year a very broad band of 32 per cent will be introduced, with the marginal rate dropping to 29 per cent the following year.
No previous government had dared deal the principle of equality such a vicious blow. The highest earners will cream off the bulk of the social benefits under the tax regime, leaving nothing for the lower earners.
The Prime Minister said he had been criticised for not keeping his 2008 promise and now he was criticised for keeping part of it.
That is pure political-speak. When politicians make promises, it is right to hold them to them as such. But when these promises are unsocial, even anti-social, it is imperative and not just right, to criticise and condemn them.
If the Government had millions to forego, it should have spread the amount such that inequality was reduced, not fed to grow further. On top of that, single people – some 2,300 of them – who earn only the minimum wage plus the statutory bonuses which everyone else gets, have now become liable to tax. I’m sure that was due to an oversight.
But the Prime Minister, caught out as having bumbled on this one, simply arrogantly argued it away rather than saying he would remedy the slip. So did the Minister of Finance.
Inequality was also increased by the removal of the five per cent tax on inherited residences, another regressive measure since it will favour families with higher value residences.
But at least this value is of a passive nature rather than active actions by taxpayers. The Finance Minister found some money to adjust children’s allowances, which was good. But he could have done a lot better had he not decided to promote inequality rather than equality.
To boot the Opposition has said that if the Budget did not pass – should Franco Debono vote against the Government – it would implement the “good things” in the Budget. In that case, the guilt for raising inequality would fall on its conscience.
In 55 years observing, practising and analysing politics, I have never seen the likes of this social obscenity from either party.