We have had continuous economic growth in Malta for many years now. GDP has risen from €6.9 billion in 2011 to €8.8bn in 2015, an impressive €1.9bn or 27.5 per cent. The country is passing through a cycle of prosperity, so why talk about lowering taxes?
We need to talk about this firstly because it is fair and equitable to reduce taxes across the board and secondly because the fiscal incentives that underlie a substantial segment of our economy are at risk. We need to address this issue now and make the necessary changes in order to have a sustainable economy into the future.
During this same 2011-2015 period the government’s annual deficit averaged €185 million annually. Government expenditure (budgets) rose from €2.8 billion in 2011 to €3.8bn in 2015, a formidable €1bn or 35 per cent increase in government spending. Over the five years to 2015, government expenditure averaged at 42.4 per cent of GDP.
Let us try and analyse some numbers in a meaningful way. Total government revenues for 2011 of €2.64 billion were fairly equivalent to the total budget expenditure for 2010 of €2.71 billion. The total revenues for 2012 of €2.80 billion were also equivalent to the total expenditure for 2011 of €2.82 billion.
This pattern, where the revenue of one year is equivalent to the expenditure of the immediately preceding year, predates 2011 and carries on all the way to 2015.
Deficits and shortfalls in liquidity are financed to a degree by increasing government debt. Government debt increased from €4.76 billion in 2011 to €5.55 billion in 2015. The systemic deficits must be the prime cause of the unrelenting increase in government debt.
Make no mistake about it. We live in a high-tax country. Add the 18 per cent VAT rate, on mostly everything we purchase, to the 35 per cent standard tax rate, plus a couple of percentage points for social security contributions, and you get an overall rate of taxation of between 50 and 60 per cent. This is more than half of a taxpayer’s income and is a disincentive for business, entrepreneurs and for all those individuals who wish to get ahead and realise their ambitions.
The above facts tell a story. They tell the story of huge budgets fuelled by high taxation. They tell the story that no matter how much government revenues increase, even when they increase sufficiently to match costs, governments still spend more.
This is an unhealthy addiction to overspending, deficits and increasing debt. Deficits and debt are an obstacle to reducing taxation so, as reduce taxation we must, this is a problem.
Lower taxation for companies frees up money for reinvestment within business. The ensuing larger profit margins would also translate to higher shareholder dividends. Increasing profits and higher yields are signals to investors, encouraging them to invest further in business activities. Finance would be more readily available to entrepreneurs, with the knock-on effect of attracting further investment and job creation.
We live in a high-tax country [with] an overall rate of taxation of between 50 and 60 per cent
More investment mean higher profits and increased tax revenues. Lower company tax also assists start-ups and innovation. New jobs mean more income tax revenues. Apart from all this, lower company and personal taxation would encourage companies and individuals to be more tax compliant, and this would bring a large portion (maybe even up to 80 per cent) of the underground economy into the light of day and into the tax net.
Lower tax will leave more money in individual taxpayers’ pockets which, of course, would reduce the government burden of assisting many, as not so many will need assistance. Vulnerable sectors of our society will always need to be helped by government.
If personal taxation is lowered, the tax revenues on the same incomes will decrease. But as taxpayers have more disposable income, both consumer spending and savings will increase and this will sustain the economy and make it resilient as well as create jobs with positive spinoffs on indirect tax revenues. Lower personal taxation will also assist employers who suddenly find that their employees have increased their net wages and not at the expense of the business.
Lower tax for residents and non-residents, domiciled or not, would place Malta beyond criticism internationally and provide an economic model that is sustainable for the long term. The standard rate would need to be set at a level that would protect the efficacy of our double taxation treaty network and not fall foul of international anti-abuse provisions.
Anyone working in financial services in Malta knows that our sector is in the stranglehold of EU and OECD regulation and gasping for air. International companies are looking for good, solid, simple solutions that will not bring them bad press or aggravation with their home tax authorities. They need to find ways and means that allow them to follow their international strategies. It does not get better than a lower standard tax rate that does not discriminate between locals and foreigners.
With trickle-down economics now being totally discredited, a number of EU countries have cut their tax rates in order to stimulate growth and attract investment, and others are following suit.
Assuming that we are now all enthused by the idea of lowering taxation across the board, let us see how we can make this work. We should start by setting ourselves a target such as, for example, that of reducing income (personal) and company tax to a maximum standard rate of 17 per cent.
An alternative option would be that of having a standard company rate of 20 per cent and an SME rate of 15 per cent. This structure could be reflected in personal taxation by having zero, 15 and 20 per cent taxable bands.
We would get from 35 per cent to 17 per cent by reducing both the maximum personal tax rate and the standard company tax rate gradually over a period of seven years to 17 per cent. This means we would need to reduce the rate by 18 percentage points. A sensible way to do this would be to, say, from 2018, reduce the rates, alternately, by four and five percentage points every two years (one year for the rate change and another to stabilise the impact and review the result).
The loss in revenue arising from the falling tax rates would be compensated and very likely exceeded by improved compliance and an expansion of the tax base both in value and quantity. In this way, by 2024 we would have achieved our goal of a 17 per cent maximum standard tax rate and set our country on the course of economic sustainability for this and future generations.
David Marinelli is the CEO of Portman International, a Maltese financial services company.