VAT no burden: A different perspective (Conclusion)

Business Page of October 31 had referred to statements both by President Jagdeo and Finance Minister Dr Ashni Singh that the Value-Added Tax and the Excise Tax introduced in 2007 would have been revenue neutral. In 2007 alone, the excess of over the prior year – the basis for revenue-neutrality – was $12.6 billion, or 49%, of which VAT by itself had exceeded the taxes it was supposed to replace by a staggering 76%. Over a four year period the combined excess would therefore be approximately $50 billion. The question then is whether or not a reduction of taxes would have hurt or helped the economy and more importantly, whether the government has been honest with the VAT rate of 16%. And here a distinction needs to be made between the economy and important segments of the economy. Two women’s interests organisations, Red Thread and Grassroots Women across Race are under no illusion and from their own experiences are convinced that VAT for many, many (women) is a burden that is beyond bearing.

The government and its economists remind the country that the women miss the bigger picture of the “macro-economic fundamentals” and that the women ignore the benefits which taxation brings to the country as a whole such as the availability of accessible and free education, health care, better roads and other infrastructure. Those who make these arguments for the government often ignore the questionable quality of the public services and might never have gone to the Admissions Unit of any of our public hospitals to see the hours of waiting before receiving attention, nor are they likely to have been aware of the state of the Den Amstel or Cane Grove Primary Schools. They ignore too that however good the roads which the poor and the rich alike enjoy, the Guyana economy – whether in the hinterland or on the coastland – is a cash economy. The stallholder or the minibus conductor will only accept money and if you do not have money to pay, neither the availability of the goods nor the quality of the roads makes any difference.

The rent which the single mother is asked to pay for the most modest accommodation in the most working class of areas is often more than the gross pay of the nurse or the teacher in the public school system. Yet the more fortunate among us would carp about the nurses for their inattention to patients or the teachers for supplementing their income with “lessons.”

Jagdeo has closed the VAT rate debate
The problem in the discussion about the economy and taxation is that those two sides are speaking from very different perspectives and interests. The Minister of Finance is engaged in an abstract argument of which he may have no personal experience and speaks from the top. The Red Thread and Grassroots Women Across Race on the other hand speak of their daily experiences from the bottom. It is not hard to see the real issues from the theoretical arguments.

The problem for the poor is that the strength and logic of their argument count for nothing and since they have neither the time nor the inclination to wage a sustained and effective campaign, change in their favour is almost impossible. Jagdeo has already said that VAT is no burden which means that for all intents and purposes the matter is closed. Of course no one expects the government to admit that as an expenditure tax, VAT is borne only by consumers. Since women bear the predominant role in equipping the children for school and putting food on the table, they feel the pain of the VAT more than the menfolk.

Favouring the better off
Nor will the government wish to admit that the tax system is skewed in favour of the better off; that all tax changes since 1992 have effectively shifted the burden to the poor and in favour of the better off. Guyana has effectively abolished Estate Duty which used to capture in death the taxes which were avoided in life. A capital gains tax which already favours the shareholding class over the working class has been abolished on the gains made from trading in shares in public companies. Just ask yourselves which is the dominant shareholding class and you will see the bias in the tax system. And as the column has consistently pointed out the perquisites, expense allowances and benefits received by the managerial and entrepreneurial class including chauffeur-driven expensive vehicles, 24 hour security and meals at the most expensive restaurants are generally tax free, while the travel allowance paid to the ordinary to get to work on the minibus is taxed at the rate of 33⅓%. For the poor a meal out is a cheap Chinese while the managerial class enjoys business paid nights out at the expense of the taxpayers.

Even in tax administration, the die is loaded against the poor. They are at best employees who are sitting ducks under the PAYE system and neither need nor can afford an accountant to represent them at the GRA. Contrast that with the self-employed who decide how much tax they will pay and often pay the equally dishonest accountant to aid and abet them in manufacturing accounts to suit.

The solution in my view lies both in the income as well as the expenditure side of the accounts. In fact I think it is necessary first to decide what is the expenditure that the government needs to incur and then consider how best to finance that expenditure. Let us use as an example the Ministry of Health for which there are two ministers. With little understanding of what their roles are and not enough work for them to do, the two ministers dabble in the day-to-day affairs of the ministry and the hospitals in a manner that creates confusion rather than solutions.

In my discussion on the recent maternal and child deaths with two leading doctors I was shocked to learn that while many hospitals have modern buildings and state of the art equipment the experts and technicians to operate them are not available; that we seem to pay more attention to AIDS than to women’s health issues; that basic information on ante-natal care and nutrition is not disseminated. And pointedly, that in what appears to be a matter of policy, we underpay the caregivers.

Drugs and money for friends
This is the same ministry which along with the Georgetown Public Hospital Corporation has been paying hundreds of millions of dollars annually by way of advance payments to a friend of the government to buy generic drugs from India. These same drugs can be purchased direct or by way of tender through other suppliers at reduced cost. In 2009 the payments by the Ministry of Health and the GHPC amounted to $2.135 billion! That the government persists in this reckless arrogance suggests that instead of attempting to reduce cost, the government is more concerned about enriching its friends.

Excluding the expenditure on health by the regions, the GPHC and the Ministry of Health spent $7.3 billion in 2009 in the recurrent budget. This means that the dubious drug purchases alone accounted for 30% of the expenditure of those two agencies. If we add capital expenditure, the total expenditure in 2009 by these two agencies was approximately $10 billion. In 2010 the budgeted current expenditure of the GHPC is $3.5 billion while the expenditure for the Ministry of Health is $4.5 billion.

Reduced expenditure does not mean reduced value and it is my view is that with better policy formulation, efficient execution, reduced waste and corruption and enhanced cost management, the annual expenditure allocation on the Ministry of Health can be reduced by at least a couple of several hundred millions of dollars, if not billions.

Ministry of Local Government
Now, take the Ministry of Local Government that has overseen the destruction of democracy at the local government level. This ministry that operates like the Wild West has a Minister and two former ministers paid exorbitant salaries and benefits for doing mainly party work. If this ministry was scrapped, we could very well save much of the $250 million in the recurrent budget and $1.250 billion in capital budget.

Then we can look at the Ministry of Public Works and Communication which in 2009 had a capital budget (including supplementaries) of $10.2 billion but did not even keep a contract register to record details of financial transactions of projects undertaken by the ministry. On roads and bridges alone some $5.9 billion was spent in 2009, no doubt much of it completely wasted.

The Office of the President and NICIL which are the havens of non-accountability, non-transparency and favouritism control funds that are so secret and mismanaged they are beyond the reach of any auditor or accountant. In fact nothing less than a forensic auditor by a trained fraud investigator could unravel what has taken place around these entities.

The bigger picture
What is a safe bet is that included in the total recurrent and capital expenditure in 2009 of $128 billion, must conservatively, be at least 15% ($19.2 billion) of avoidable, unnecessary expenditure that could be cut without any loss of efficiency. If say 60% of those savings ($11.52 billion) are applied to improved salaries to government employees and payments to our senior citizens, the remaining 40% ($7.68 billion) can be applied to a reduction of the VAT which is budgeted in 2010 to bring in $25 billion. That means that instead of VAT having to bring in $25 billion in 2010 it need only to bring in $17.4 billion. The VAT rate can therefore be comfortably set at 12%, bringing a boost to the economy and relief to the poorer sections of our society.

The evidence from economic research around the world indicates that tax rates have a direct influence on saving, entrepreneurship, lower rates of economic growth, reduced rates of personal income growth, lower rates of capital formation and lower than expected aggregate labour supply. In the case of Guyana, high tax rates may also cause outward migration and the brain drain.

Just as I am sure that both the President and the Finance Minister know that 12% is what the VAT rate should have been in the first place, they also know the economic arguments for lower rates. But then from the government’s point of view that would reduce the pool of funds for whimsical spending.

Of course a more detailed examination of the current revenue and expenditure structure will necessarily reveal other possibilities. Meaningful tax reform will suggest variations of the existing tax structure, the way revenue is raised between the central and regional governments, and possibly new means of collecting taxes from those who do not currently pay. Organisational changes could see the restructuring and reduction of the number of ministries and departments, number of ministers and advisers, resulting in the reduction and re-prioritisation of expenditure.

While it would be nice for the Economic Services Committee of the National Assembly to take on such an exercise, I am not optimistic that this or the reduction of the VAT rate will happen any time soon.

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