Taxing for political convenience

Dreary stuff the following, unless you find the euro in your pocket of some interest. The Financial Estimates for 2011, presented by the Finance Minister with his Budget Speech on Monday, give data on income tax, among other things. The bare details tell us that this time last year the minister planned to collect €850 million from the tax. But, despite once-only revenue from another tax amnesty, and the rather high cost of living increase, which boosted taxable income, the revised total for 2010 now stands at €810 million.

Undeterred by the shortfall the Finance Minister estimates that the Income Tax will yield €821.4 million in 2011. The finicky, unrounded figure is interesting. But not as interesting as the fact that, in his Budget Speech, the minister said nothing at all about his party’s pre-election promise to slash the top income tax rate from 35 to 25 per cent for most incomes chargeable at the top rate.

Interesting because when the promise was given it was accompanied by the assurance that it made deep economic sense. It would leave more money in people’s pockets, I remember the Prime Minister saying in all earnestness. Confronted by an argument by some economists that the public finances could not as yet afford such a cut in potential revenue, the Prime Minister insisted he was right, not they.

Contradicting the economists, Lawrence Gonzi waxed lyrical that the measure, to implement in his government’s first Budget if it was re-elected, would boost the economy. He even put a figure to the cost of the cut – Lm12 million in old money. Well, the PN was elected and three Budgets have now been presented. The promised cut has not materialised.

As a matter of fact the Finance Minister has repeatedly defended the broken promise with two arguments. It was made when the economy was in better shape, is the first; the second argument by the minister is that it is irresponsible to say that the Treasury can forego revenue through a tax cut at a time when it is essential to reduce the budgetary deficit.

By the government’s own criteria that is either barefaced intellectual hypocrisy or a conversion unparalleled in Malta’s economic history. The global situation was already deteriorating at the time of the 2008 general election and the stressed budgetary balance could expect tighter times to come. Yet Dr Gonzi and his team persisted with their fervent fiscal promise to the people.

An honest intellectual stance would tell them that, by their reasoning, with economic activity weak during 2008 and 2009, and not that great in 2010 though there has been some skewed recovery, it was more important than ever to cut income tax and leave more money in people’s pockets to spend. Instead, the government team present an opposite argument without admitting that their pre-election promise was purposely false, or at least economically wrong.

I am part of the school of thought that holds that cutting income tax here, where spending quickly leaks into imports, will not work as it does in economies which are less open and where private consumption is a much higher contributor to the Gross National Product than it is in Malta. If the government has converted to that view, it has not had the courage to say that its earlier promise was wrong.

Nor will it say so. For the simple reason that the promise was pure electioneering. It had nothing to do with the state of the economy. It was all about winning voters. Which is why, for the same reason, the Finance Minister will probably tinker with tax rates this time next year and, if he had not done so already, will certainly cut the top tax income rate to 25 per cent for most people 12 months later, in the Budget for 2013, election year.

Applying the fiscal policy most suited to the economy’s requirements and in a context of fairness and social justice will not come into it. It will again be all about politicking and more electioneering do.

Little wonder that many people who bother to follow such antics grow more and more cynical about politics.


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