If Mitt Romney was in Guyana, his 13.9% tax rate would have been lower

Introduction
If Governor Mitt Romney, a leading candidate for the Republican nomination in the US 2012 presidential elections thought that he would neutralise the attacks by his fellow candidates by publicising his 2010 tax returns, he was wrong.

In fact, the revelation that his effective tax rate – the percentage which the tax he pays bears to his total income – is a mere 13.9%, has served to internationalise a debate on what is a fair tax.

Fairness has been regarded as an indispensable ingredient of a proper tax system even before Adam Smith wrote it in stone as one of the canons of taxation.

It is now a hot topic and is the subject of three columns in last week’s Economist. It also made the editorial of the Stabroek News on January 26. The Trinidad and Tobago government too has announced another tax reform project, following a similar announcement by President Donald Ramotar. Let us return to Mr Romney for a moment.

Poor man
The poor man is worth a mere US$ quarter billion, and together with his wife paid about $3 million in federal income taxes on income of $21.7 million in 2010. His effective tax rate of 13.9 per cent is less than half the 35 per cent top rate of federal income tax applied to any annual income over $379,150 for most top earners.

It is no consolation to the fairer tax movement that the effective rate the Romneys will pay in 2011 is 15%.

Because so much of Mr Romney’s income comes from capital gains, dividends and interest on investments he holds in funds and stocks, he greatly benefits from America’s relatively low 15 per cent rate of capital gains tax (CGT).

Despite having a Swiss bank account and investments in the Caymans under a blind trust, there is no suggestion of impropriety by Mr Romney. He went to great lengths to point out that what he, or rather his trustees, were doing was all within the US tax code that has as many loopholes as our domestic cast net. Romney’s tax rate is below that of most wage-earning Americans because most of his income comes from capital gains on investments.

And that is part of the problem. The other part is Mr Romney’s insensitivity to the glaring income and wealth disparity at a time when there are fourteen million unemployed Americans; where poverty as defined in that country is on the increase, engendering the Occupy Wall Street movement that protested what its leaders consider the unfair share of the income and wealth that goes to the 1%.

Buffet by another name
The USA is a country of data: within days of the end of a month or quarter or year, figures on just about every quantitative measure are released by some department or the other. So it did not take long for Americans to learn that the top 1% of their households earned annually an average of US$1.2 million in 2011 while the national average was US$26,000; accounted for 17% of the income earned by all Americans; or that the top 0.1% earned 8% of the total income.

What accounts for some of the disparity is how the income is earned. The richest 1% receive half their income from wages, salaries and bonuses, a quarter from self-employment and the balance from dividends, interest and capital gains.

The problem lies in the tax treatment of the various sources of income with income from employment being taxed at a higher rate than investment income. And that is where the debate gets heated, philosophical and ideological.

In terms that could easily apply to Guyana, US President Barack Obama denounced that country’s bottom heavy tax system, arguing that persons whose annual income is a million and more should pay at least 30% tax, which is the rate paid by the average middle class household in employment. President Obama likes to cite the “Buffett Rule,” whereby the Omaha billionaire and third richest man in the world pays income tax at a lower effective rate than his secretary does, largely because so much of his income comes from investments. We too have our Buffet Rule except that it goes by another name.

Bush’s views on double taxation
In 1986, the US introduced tax reform measures eliminating the gap between the ordinary and capital gains rates. But while the gap began to widen again during President Bill Clinton’s second term, it became a chasm in 2003 when the George W Bush tax cuts sliced the top rate on dividends and long-term capital gains from 28 per cent to 15 per cent. As the share of income derived from investments has increased over that time, the gap has widened to a point where most persons, including Buffet but excluding the 1%, now believe that the situation is unsustainable and indefensible.

In seeking to justify the cuts, President Bush said he proposed to eliminate the US dividend tax saying that while “it’s fair to tax a company’s profits, it’s not fair to double-tax by taxing the shareholder on the same profits.” Not many people, including economists and almost all the G20 countries, agree with him. Ironically, Guyana and a number of countries in the Caribbean do and in 1994, the PPP/C government of Cheddi Jagan eliminated the tax on dividends received by residents from resident companies.

The argument that an income should not be taxed twice defies not only principle but practice as well, with Peter Ramsaroop’s 33⅓% income tax plus 16% VAT being a politically artful but technically incorrect case. Given that Guyana has a hybrid system of taxation, the income earned from employment is taxed at source on the Pay As You Earn basis and then again is subject to a range of expenditure taxes including most popularly the Value-Added Tax (VAT). Call it what you will, the income is taxed twice.

No surrogate
Those who support Bush’s argument miss the fundamental point that a company is in law a separate legal entity and not a surrogate for its members and shareholders. It can own property, enter into contracts, commit offences and sue or be sued in the courts. Indeed some companies in a single case, take up more of the court’s time than they pay in taxes. But the courts are not the only public goods a company uses: it uses the roads and other public physical and social infrastructure; it calls on the police for protection and security and has a whole department of government dedicated to serve it. It hardly seems unreasonable to expect the company, on its own, independent behalf to help pay for the availability and use of those public goods through taxes.

But apart from those monetary benefits there is another valuable benefit which a company enjoys and that is the benefit of limited liability.

The first UK Companies Act in 1844 was a transformational measure that was immediately embraced by the capitalist class, despite the fact that it came with high corporate and personal tax rates. One hundred and sixty-eight years later, despite several rounds of tax reform, dividends are taxable in the hands of the shareholder at rates varying from 10% to 42.5%.

Here in Guyana we do have statistics. The trouble is that they are not available to the general public and hardly ever feature in any public reports or pronouncements. It is a national embarrassment that we have to rely on the periodic reports by international organisations like the IMF and the World Bank to provide us with relevant information. It is illogical, and indeed immoral, that the capital gain on the disposal of a house is taxed at the rate of 20% but the gain on the shares in public companies is exempt. It is not as if the so-called incentives of no taxation of dividends has brought about a large number of companies or shares in which the average retiree can invest.

In fact, the incentives of no tax on dividends and the exemption from Capital Gains Tax of shares in public have spanned more than a decade in which none of our public companies has offered any shares to the public, nor has any private company gone public.

Budget 2012
As we approach the 2012 Budget and supplementaries for unfunded 2011 expenditure, the political parties on the opposition benches will be concretising the generous tax cut proposals in their 2011 elections manifestos. No doubt it will be a healthy and instructive exchange with Dr Ashni Singh under whose watch the VAT was introduced.

But before the parties start their tinkering and trading over some matters of percentages and detail to satisfy those who voted for them, it would be far more useful for the country, if not for them politically, to agree on some fundamental objectives of the changes and reforms they seek.

A challenge for both sides is to stem the widening deficit we experienced under the Jagdeo administration, accustomed to debt-write off, sale of public assets and ever increasing tax revenues.

The apparent endless stream of debt write-off has come to an end, and while tax collections continue to rise, they cannot compensate for the spending over-drive into which the Jagdeo-Singh team has taken us.

Conclusion
The evidence from the Reagan/Bush years to the experiences of Greece, Italy and others is that deficit reduction has to have at least an equal mix of increased taxes and spending cuts.

Tax concessions are considered in economics as a form of expenditure. They need to be re-evaluated and reduced.

We have both central and regional systems of government. We do not need the large number of ministries and ministers.

We have a number of statutory bodies charged with responsibilities which previously fell on the ministries. Some rationalisation seems inevitable.

Jagdeo, who saw himself as the country’s economist-in-chief for nearly two decades, did so much tinkering with the tax system in matters both great and small that a more comprehensive review is now overdue. Guyana is a republic committed to equality and the rule of law but with a constitution which places one person above our supreme law.

And the two leading justices who would be expected to rule on tax cases in the courts were granted exemption from tax on their emoluments during the Jagdeo administration.

There must be other and better ways to reward all our judges. We are a republic without republicans. Mr Romney may seriously consider becoming the first.

Tax rates hardly matter

Introduction
As promised, this week’s column looks at the importance of tax rates in the overall scheme of tax policy in any country. I start by saying that lower rates of tax do matter – they allow the taxpayer to retain a higher level of the income earned which they can use for re-investment or higher dividend payments to shareholders. They can also make a country more competitive since prospective investors pay some attention to countries’ nominal tax rates in their investment equation. Hence, the decision to reduce the corporate tax rates by five percentage points would be welcomed both by companies and individuals, as evidenced by the swift response of the Private Sector Commission (PSC) to the announcement by the Minister of Finance.

In making his announcement the Minister said companies benefiting from this measure would be in a position to retain and invest a significantly higher share of their profits. While some may suggest that the reduction in the tax rate had an unmistakable eye on the upcoming general elections, they cannot argue with the effect advanced by the Minister since by definition a reduced tax charge leaves more after-tax profits which are available for investments, higher dividend payments and related party loans. But seemingly too quick to please the political directorate, it was the private sector representatives who stated that the reduction would make Guyana competitive in terms of tax rates.

The private sector leaders travel around and must know that the corporate rate in two of our major Caricom trading partners (Trinidad and Tobago and Barbados) is 25% while our reduced rates are 30% for non-commercial companies, 40% for commercial companies and 45% for telephone companies. Non-regional investors on the other hand would be familiar with much lower tax rates in their own countries, so that our 30%/40% would still sound to them extremely high.

Government failure
The biggest but unacknowledged problem for the private sector is the failure by this government to address tax policy and tax reform which it has been promising for eighteen years. For example, tax policy would address how we treat one sector over another, whether a single person should receive the same personal allowance as the single parent with a number of children, whether there should be differentials in tax rates, the balance between direct and indirect taxes, extending the use of the withholding tax to domestic contractors, etc. Unfortunately what passes for tax policy is the demand for tax revenues to finance a bloated, politicised and inefficient bureaucracy and a government that seems to have an insatiable appetite to spend, spend and spend.

I strongly believe that the flat, across-the-board reduction of five percentage points is both intellectually lazy and politically cowardly. If the officials of the Ministry of Finance were to read the report of the Bank of Guyana (latest mid-year 2010) or indeed the statistics in their own National Estimates, they would see that the business community is increasingly investment-averse despite all the tax and contracts goodies thrown their way. As the following table shows, growth in the economy is being driven by the public sector.

[table to be inserted]

Source: National Estimates 2011

Goodies
The tax laws are now replete with all forms of incentives, some of which are general and others specific, some found in legislation and others in agreements signed by the political arm of the government. Some are intended to encourage exports (the export allowance), investments (the Income Tax in Aid of Industry) which also provides tax holidays for investments in the hinterland, low cost housing and exemption from VAT.

More than a decade after its introduction and generous exemptions for public companies investments, the Stock Exchange remains extremely inactive with no new issuers, i.e., companies going public, or existing companies offering new issues. In the absence of rules on thin capitalisation and the differential tax treatment of loans versus dividends, even our larger public companies find it cheaper to borrow than to raise new capital. There was a time when Banks DIH and DDL could be relied upon to make rights issue or bonus shares which allowed for some greater liquidity in the market. They have not needed to do so.

The commercial banks hold deposits of more than $230 billion dollars of which loans and advances, inclusive of the public sector loans, amounted to $68.9 billion. For several years the government has been critical of the commercial banks and Minister Manzoor Nadir, the self-appointed chief spokesperson of the 2011 Budget is on record as stating that “the commercial banks have been penalizing our people for too long.” He is also on record for cautioning against differential tax rates to protect the locally manufactured products since they “protect local inefficiencies.” That Mr Nadir now supports the things he had earlier railed against shows how politicised the tax system is, how it is influenced by the changing tides of political opportunitism and why we have a tax system that is, by any measure other than revenue collection, so dysfunctional.

Drivers
Tax policy has to be driven by a vision and relevant information. This column has called for more relevant information to be disclosed in public documents. Principal among these would be the annual report of the Guyana Revenue Authority which the Minister of Finance has failed to table in the National Assembly for some time now. Let us see how much the construction sector, the bauxite sector, the forestry sector, the agriculture sector including rice, sugar and other crops sectors contribute to the national coffers, and how much remissions, rebates and holidays they receive which may amount to billions each year. And yes, we should be able to see how much each region contributes and compare this with their receipts from the central government.

The Minister has access to data that would tell him that the bulk of the corporate taxes collected by the GRA is paid literally by a handful of companies. These are the commercial banks, Banks DIH and DDL, GT&T and Digicel and the oil distribution companies. The majority of companies could not care about tax rate – they decide how much tax they will pay and have their accounts prepared accordingly. This of course is also true of the self-employed, for which Regent Street is a metonym and to which political protest is as applicable as tax evasion is. There is a strong suspicion that setting a payment level for any period is also true of VAT, and as I have written before in this column, that some politicians have given pledges to the business community for tax support in exchange for votes.

Conclusion
Tax policy and tax reform will clearly have to wait for some years. The Jagdeo-Singh duo is comfortable with the status quo under which urban workers and consumers are the biggest contributors. They are equally comfortable with some sectors and segments making no contribution to the national coffers while demanding so much. The parliamentary debate on the 2011 Budget will close without any discussion on either tax policy or tax reform. In that sense, we are all losers.

VAT no burden: A different perspective

Introduction
Last week’s column addressed President Jagdeo’s astonishing, unfounded and uninformed statement that VAT was no burden and therefore in no need of revision. For a newspaper column, it provided an exhaustive and hopefully convincing case of President Jagdeo and Dr Ashni Singh’s broken promise to make VAT revenue-neutral. And so I did not think it was necessary or useful to return to this topic this week.

Let us not be naive. The President could not possibly admit that VAT is a burden. If he did, then being the considerate leader he claims to be, he would have had to do something about easing the burden on “his people” by reducing taxes, something he has never done across the board.

He has found it easier to grant vast sums in concessions to friends, without regard for the laws of the land, than to honour a commitment to the nation. To change the law to pay emoluments to the Chancellor, the Chief Justice and the Auditor General tax free, making some more equal than others. And yes too, to increasing presidential benefits with no limits and no taxation, defying Benjamin Franklin who wrote more than 200 years ago, “In this world nothing can be said to be certain, except death and taxes.” But to the poor, the only yes is to the insensitivity of their plight.

Too poor to ‘pay’ attention
My reason for returning to the question of the VAT is because of the level of feedback on the column, including the wag who said that after paying income tax at 33⅓% and VAT at 16%, the ordinary person cannot afford even to “pay” attention to their own plight. Another asked me whether there was nothing that could be done to ease the burden of the high rate of VAT. I had to say that I could not be optimistic. Given the unlawful and increasingly outlandish things the Jagdeo administration does without any hint of embarrassment, there must be few things that it would not do. But another reason for the absence of any optimism is because others who might be expected to challenge, are themselves challenged, emasculated and supine. The consumer movement and the TUC, effectively leaderless and non-existent, have lost both their appetite and capacity to advocate, let alone to protest and defy. The first for fear of losing its government subsidy; the other having lost its credibility. The private sector has chosen the path of least resistance; the rest of society that of apathy.

And of course, everyone wants to be a president, even if they, like Jagdeo, do not know and care whether VAT at 16% on top of a very low threshold income tax rate of 33⅓% is indeed burdensome. Apparently knowledge of such mundane matters is neither an asset nor a requirement for the job of president.

The promise and the reality
In 1992 the PPP/C came to power on a promise of socialism and social justice. Then in the face of the IMF it made an about turn, adopting free market economics, the essence of capitalism. Ever since the IMF programme came to an end, the economy has had no central theme or philosophy. The President may have been educated in Russia but he seems to have an antipathy to both the word and the philosophy of socialism. Even the area in which this government has had its greatest success, housing, contrast the policy of land distribution between the poor and the powerful. Compare Pradoville 1 with Plastic City, or Eccles with Bare Root.

And consider the more blatant, in your face Pradoville 2, at Sparendaam, East Coast Demerara, where the elite are setting up one of the most exclusive communities in Guyana.

What would the Norwegians think of his much touted fear of rising sea levels submerging our coast when there is building right on the banks of the Atlantic Ocean?

The taxpayers of the country would like to know how the land was advertised, allocated and valued; who approved the community and the housing plans; who the money is being paid to; whether there are any conditions and covenants?

If our Audit Office was not so unqualified and compromised, these are the questions it would seek answers to, not whether a few hundred dollars a day spent on the residents of the Palms is value for money.

New brand of economic policy
In a country increasingly run not for a class as capitalism or socialism does, but rather for a handful of individuals, nepotism becomes too charitable a label to describe the economy’s direction. Under this new dispensation, the assets of the state are at the disposal of a few, in which no less than the President adds to the debate about evasion and avoidance, even as a covenant about the period of ownership prior to sale is dispensed with. Another word that comes to mind is oligarchy, a term that is favoured by Dr Tarron Khemraj.

If we were serious about running a national economy, our Finance Minister would not be publishing a statutorily required mid-year of so little moment and equally little practical use.

And this is not criticising simply for its own sake. Where does the Minister tell us, as he is required to do, about the impact on the country’s finances of the delay in the receipt of the Norwegian funds, or where further sums will come from to buy additional generating capacity for GPL? In 2009, GPL received more than three billion dollars from the state, Guysuco many times more, offering in return, blackouts and excuses respectively.

Instead the mid-year report was replete with national income data which could, with more authority and authenticity, have been published by the Bureau of Statistics. And in the process of that delay, the Bank of Guyana, like the Bureau of Statistics, withholds its highly useful half-year report so as not to steal someone else’s squib-like thunder. Under current economic policy and management, it is so much more necessary to satisfy the ego of one or two than the needs of the nation.

Is tax reform dead?
Now that the President has spoken on the tax system all the talk about tax reform might be considered academic and meaningless. A couple of weeks ago I declined an invitation to meet with a consultant ostensibly retained to advise on tax reform.

When the appointment of a consultant to carry out the same or a similar study came up at the level of the Private Sector Commission some time ago, the clear inference was that the appointee must be ‘anyone but Ram.’ I wish the study well even as I recognise that for eighteen years this government has promised tax reform in one breath while delivering regressivity of the tax system that causes the poor to flee into the underground economy or abroad, in another. Nothing will happen before elections 2011, since according to Jagdeo’s thinking it ‘ain’t broken,’ what is there to fix?

Perhaps the consultant can do with some numbers and statistics. Between 1992 and 2009, tax revenues have climbed from seventeen billion dollars to ninety billion dollars. The employed category has seen its contribution to those revenues increase by 860%, from $1.3 billion to $13.2 billion. For companies, their contribution to tax revenues has declined from 26% in 1992 to 20% in 2009, with most of the taxes coming from the commercial banks, GT&T and Banks DIH and DDL. The self-employed that now dominate the country’s economy contribute less than 2.5% of its tax revenues.

And in the invoice example I gave last week, some businesspersons actually benefit by stealing VAT under a system that puts the cat to mind the milk. An economy in which the illegal and criminal are major components must by definition have elements in its tax system that are also illegal and criminal.

And as we think of the tax system and its components, consider that VAT and excise taxes alone contribute more than 50% of total tax revenues.

It is trite to state that VAT and Excise Taxes are borne by consumers including the employed, retired and unemployed. While I have never subscribed to the straight maths of adding the rate of income tax (33⅓%) and VAT (16%) to arrive at the tax burden on the poor, the tax revenue data suggest that the 50% tax burden on the working and non-working poor is not too far fetched.

Reducing the personal allowance
Even before 1994 when I presented a paper Tax Reform – A Vehicle for Economic Recovery, I was convinced that our tax system badly needed reforming. Yes, we have taken some major actions such as the unification of the revenue collection agencies and sporadically have increased one element of the personal allowance.

But what we are asked to forget is that overall we have reduced the personal allowance from the high of a dollar value and one third of taxable income, which prevailed under the late Desmond Hoyte. This means that if a person’s salary was $150,000 per month, their personal allowance was $50,000. It is now only $35,000.

Conclusion
So does tax reform really mean lowering taxes? The answer is an unambiguous “not necessarily.” It is not something that can be easily dealt with in these columns, but I will try to do so. When the father of modern economics Adam Smith set out the four cardinal principles of a good tax system – equity, certainty, inconvenience and economy in collection costs, the question of big, bloated and wasteful governments was not an issue. It is very much so in the Guyana context. Of Adam Smith’s four principles, equity is the single largest question for us. But in a more practical way, it is the level of taxation that is stifling our economy, or sections of it, as some pay and others do not.

We will explore this further in the next fortnight since next week’s Business Page will take a brief look at the 2009 Auditor General’s Report that really tells us nothing that we do not already know.

The tragedy of Godwin Maxwell

Introduction
We will soon forget the name Godwin Maxwell. But his story is most likely unique in Guyana. Mr Maxwell, a man who according to the press made a living by being a jack of all trades in the Mahaicony area, met his death in the most unusual circumstances. Having been granted bail of $30,000 he escaped from police custody and jumped into the Mahaicony River where he died by drowning. He was on a charge of tax evasion. Let us not stretch this. Neither the GRA nor the Magistrate could in any way be remotely responsible for Mr Maxwell’s unfortunate death. The GRA has a mandate to collect taxes and the Magistrate has a duty to execute the law.

Deal with tax evasion
This column has consistently called for and supported the efforts of the authorities to deal with tax evasion. My interaction and experience suggest that there are some genuine efforts to deal with it. But one has to wonder why, like in the drug trade, only the small fish ever get caught. With the politicisation of all aspects of public administration in Guyana, it would be unrealistic and naïve to believe that political influences are not brought to bear on the GRA. Indeed the story about a certain politico using his weight to get containers cleared rings with the loudness of truth.

We are told that Mr Maxwell is a promoter, even as the poor man had to depend on relatives to raise thirty thousand to post his bail. Unfortunately even a Freedom of Information Act would not allow us to know whether the country’s better-heeled promoters are pursued with the same vigour.

A country that cares about corruption would have laws that require disclosure, not to some secretive entity like the Integrity Commission, but to the public. To address corruption requires strong and independent institutions. We abhor them in Guyana. To address corruption we need honest and decent politicians. In Guyana, that would be the leading oxymoron. To address corruption we need equitable laws that are fairly applied. In Guyana, there is one law for the rich, the powerful and the connected and another for the poor, the voiceless and the helpless. The immorality of Guyana is that one set of people pays the tax while another spends it.

Tax evaders
It is often said with considerable justification that behind every fortune in the US was a robber baron, people whose wealth was acquired by the most unscrupulous methods, and often at the expense of others. The ‘honour roll’ includes names that have become famous with time – Andrew Carnegie, JP Morgan and John D Rockefeller being the most internationally recognised – and those who profited from bootlegging. That mostly nineteenth century American culture seems to be the model of economic development favoured by this government, with notable exceptions. Some of our business people actually make their money from various forms of contracts with the state and then turn around and cheat it – or rather the poor people like Maxwell – of taxes.

They ensure that their good deeds such as the pittances they periodically donate and the activities they promote are embellished in the national media while the bad is hidden in false returns to the tax authorities and secretive bank accounts abroad. The robber barons of the US on the other hand virtually created American philanthropy, using their immorally and illegally acquired wealth for the establishment of colleges, hospitals, museums, academies, schools, opera houses, public libraries, symphony orchestras, and charities. And they did not ship their money out of the country, hold two passports or live double lives.

Playing politics with taxes
The government in its cabinet outreach plays to the voters of the Amerindian community with outboard motors and motor cycles and more recently promises of laptop computers and solar power. The spending spree by Jagdeo on his outreaches represents a mockery of our campaign financing laws which President Jagdeo had promised since 2004 to address. And it is apposite to quote US president Ronald Reagan who said of the US: “We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much.” Jagdeo keeps racking up larger and larger domestic debts because he spends and spends, with no one around him to tell him that is not the way.

The dysfunction is also evident in the failure of our polity to give life and effect to Article 77A of the Guyana Constitution which requires the Parliament to enact a statute to provide for the formulation and implementation of objective criteria for the purpose of allocation of resources to, and the garnering of resources by local democratic organs. More than ten years on, and after at least two elections, this has not been done.

Kenya
Compare this government with how Kenya in its new constitution treats its indigenous communities and regions. Article 11 of the Kenya constitution on culture requires Parliament to enact legislation that ensures receipt by communities of compensation or royalties for the promotion and use of cultures and cultural heritage and recognises and protects ownership of indigenous seeds and plants, their genetic and diverse characteristics and their use by the communities of Kenya. That constitution sets a five-year time limit for parliament to get this done and gives any person the right to bring an action in the courts to enforce the provision.

The Kenya constitution is explicit on the taxes the central government can raise and provides for a range of taxes which the counties can raise. It also provides that revenue raised nationally is to be shared equitably among the national and county governments and for county governments to be given additional allocations from the national government’s share of the revenue, either conditionally or unconditionally. Criteria for equitable sharing are set out in Article 203, but the amount allocated to county governments must not be less than 15% of the national revenues of the preceding year. If political rivals whose supporters two years earlier were at each others’ throats, pun intended, could come up with such eminently sensible solutions, how else can one describe our situation but as dysfunctional?

The private sector
The dysfunction also takes place at the level of the private sector which is prepared to accept annual promises about tax reform that by now it should know are empty. The reason on the one hand is the weak leadership of the private sector which is satisfied about the number of loopholes and opportunities available in the laws and about VAT which shifts tax from the business to the consumer. And on the part of the government, VAT brings in all the revenue it can reasonably need and for reasons mentioned umpteen times in these columns, provides an annual windfall to the spendthrift government.

We know only too well how the tax system favours the haves over the have-nots and the self-employed over the salaried worker. The national estimates for 2010 show the contribution of the self-employed sector to total tax revenues to be 2.28%! That many salaried employees pay more taxes than the more successful businessman seems further evidence of a structural revenue dysfunction. The single woman gets no relief from the tax system, regardless of the number of children she has to feed and send to school. The small allowance paid to the worker to help defray travel costs is taxed but the chauffeur-driven cars for the company executives are not a taxable benefit. Plato was right: When there is an income tax, the just man will pay more and the unjust less on the same amount of income.

Sacred cows
For reasons which are not clear, the government has resisted calls for a withholding tax in the construction sector where the contractor often treats his employees as self-employed and therefore not in the social security system either. Tax reform should consider data on what they contribute to the tax revenues of various sectors of the economy and what is paid to them by way of transfers and subsidies. We need to start disaggregating the taxes paid by the self-employed and those who can afford attorneys and politician-attorneys to make representation for them at various fora. Too many parts of the system are dysfunctional.

But the greatest irony and dysfunction would be whether the lawyers who were in court that fateful morning will be declaring the fees they charge their clients.

Note: I had promised to continue looking at the mining sector this week. However, I thought I should address the dysfunctional environment which confronted Mr Maxwell.

Take from the Poor and Give to the Rich

Introduction
Perhaps not surprisingly the only feedback I received to last week’s column on tax evasion and tax avoidance was from persons who would generally be considered among the better off. And who want more from the society and the tax system because “they work hard, create jobs and have a choice.” Those comments are filled with arrogance, self-importance, self-interest and self-delusion. As though the stevedores, the public health workers, the cane-cutters and others do not work hard, or do not have a choice. They have a choice and that is why they daily flock the Passport Office in Camp Street from 5.30 AM for a passport to go to the Caribbean, North America, to anywhere, to work harder, to earn and to enjoy the fruits of their harder work.

In Guyana the tax system is heavily weighted against the poor and the commentator and columnist was only mildly exaggerating when he said that workers pay a total of 49% of their income in taxes – 33 1/3% income tax and 16% VAT. In fact that commentator forgot to mention the employees’ 5% NIS contribution which in public finance is a form of tax while the rough calculation of 49% ignores the range of zero-rated VAT items and the personal allowance of $35,000 per month. Overall however, the tax burden is very much around the 50% tax to GDP which makes Guyana one of the most heavily taxed countries in the world.

Soaking the Poor
Yet, for some reason there is no real commitment to tax reform about which we have been hearing since 1992. Tax reform is rat poison, for all practical purposes off the table, better understood by those who pay taxes than those who impose them. This is ironic, for some of the most important steps in the march to democracy involved taxation. The Boston Tea Party has to be given pride of place for its inspiration to the independence movement in the US and the iconic statement “no taxation without representation”. How can those of us who were around in the sixties, forget Peter D’Aguiar’s Axe the Tax Campaign when then Premier Dr. Cheddi Jagan sought to introduce a measure of tax reform? Ann Jardim, one of the leaders of the UF carefully ignored the introduction of new taxes but rallied the working class against a miniscule increase in the rate of the personal income tax. Today those who have followed her in the UF are part of the new scheme that takes from the poor to give to the rich, in taxes and state assets.

In the sixties, the political classes were on different sides of the political divide – a left-leaning government seeking to achieve a more equitable sharing of the benefits and responsibilities of citizenship by the trader and business class. Today while the ruling party may have vestiges of working class preferences, its Government seems beholden to the business class whose position of influence – whether at the head table at the Office of the President or at the Pegasus Poolside on Friday evenings – has come to be the defining feature of the Jagdeo Administration. We no longer hear about equity in the tax system, let alone the distinction between horizontal versus vertical equity. Indeed, any acceptance of the concept of tax reform by this Government is not out of conviction but out of a commitment made as a precondition to receive more and more gifts and grants from the donor community.

Stranglehold
Businesses’ stranglehold on the agenda is not peculiar to Guyana. The current wave of globalisation, driven first by the Reagan-Thatcher axis and adopted and sold by the international multilateral institutions across the developing world like snake oil salesmen of old, has witnessed a concentration of wealth and income and a widening of the socio-economic divide. The effect has been a corresponding increase in business’s ability to set the agenda for political discussion and its effective veto over public policy. In Guyana, under the agreements made by the Administration with the donor community any semblance of economic policy is driven by the National Competitiveness Council that is dominated by business interests rather than national interests. The NCC has been more successful at stalling in the interest of the status quo than at achieving any meaningful changes.

Recent research under President Bush revealed that elected officials tend to be unresponsive to the policy preferences of low-income citizens and that they disproportionately favour business interests and the wealthy in all areas of public policy. Like their counterparts in the US, those interests in Guyana also opt out or are favoured by a tax system set up in 1929 for the ruling plantation and trader class and only episodically reviewed subsequently for reform. Indeed, since 1929, there have been only two or three events that could qualify as tax reform and with only one being targeted at getting the rich to pay a fair share of the tax burden. The first of the reforms took place in the early sixties when Dr. Cheddi Jagan brought in Hungarian-born world-class economist and socialist thinker Professor Nicholas Kaldor, to overhaul the country’s tax system. Those reforms included the introduction of the Capital Gains Tax, the Property Tax and steeply progressive but at the highest end, counter-productive, marginal tax rates that went up to 75% from a base 5%.

Burnham and Hoyte
In 1970 the Burnham Administration enacted the Corporation Tax Act which introduced a separate regime of companies while incorporating over seventy sections of the Income Tax Act into the new Act. The next wave saw the abolition of dividend taxation and pensions, unification of the corporate tax rate, the abolition of the progressive income tax and the abolition of allowances – all pro-business and anti-worker in their effect. The PPP/C before President Jagdeo has the distinction of reversing the unification of tax rates and introducing the Minimum Corporation Tax on all, and then only on commercial, companies. Jagdeo has to his credit the immoral imposition of the 16% Value-Added Tax. Now, if tax evasion is illegal then we have to find a word for the imposition of a tax at a rate that is knowingly and admittedly excessive and wrong.

Barring one or two exceptions, every reform then has favoured the wealthy and the powerful at the expense of the poor. Here are some of the starkly contrasting provisions in the tax legislation.

1. Wages and salaries are fully taxed. Dividends are fully exempt.

2. Income from personal exertion is taxed at 33 1/3%. Capital gains and interest income are taxed at 20%.

3. The employer-provided vehicle, and sometimes more than one, driver(s) and security are fully exempt from tax. A travel allowance to the worker to help her defray the cost of getting from home to work is fully taxed.

4. The entertainment allowance paid to the executive is fully exempt; the meal allowance paid to the worker is taxable unless a strong case is made for it to a skeptical and uncompromising revenue officer who will claim that a meal is a private expense. As if entertainment does not include a high level of private benefit as well.

5. There is no limit to the pension that is tax-free. Most workers on retirement have to make do with under $20,000 per month. The retired top-executive receives hundreds of thousands tax free.

6. Overseas passage assistance – a throwback to the British planter class, is exempt for all but can only be enjoyed by those with spending power.

7. The working poor are taxed at source; the self-employed with all their benefits and concessions, can decide how much tax they want to pay.

8. There are ethnic and gender biases in the tax system that no one even wants to whisper, let alone acknowledge or debate.

9. The wage earner gets no deductions or allowances; business can deduct most expenses, whether it be the magazine or the business trip.

10. Duty and tax concessions favour those who have economic or political power over those who do not. Just look at the beneficiaries of the duty-free vehicles.

11. Businesses get tax holidays; their workers’ earnings are fully taxed.

12. The entrepreneur has a choice between taxable and tax-exempt business activities; the employee’s only choice is not to work.

No vision, no tax reform
The above, is a brief review of the relative position of the workers versus the executives and the “entrepreneur” under our tax laws. Those laws clearly cry out for reform. But then as the late Richard Musgrove, public finance specialist said, tax reform needs a clear and detailed vision of where we are going – a vision that is sadly lacking in President Jagdeo. That is why he could be so easily diverted to the LCDS as a tunnel-vision strategy for development and even as he heads CARICOM, could be completely sold on a Continental Destiny with neighbouring Brazil. If what he said in a recent speech he gave at a private function is to be believed, he is now looking to Brazil to help us with our rice industry even as his Government pumps $400 million in what by implication is an inefficient industry.

The cry for reform, no matter how compelling or loud, is unlikely to be heard or to win support from those of power within and influence without. A review I saw recently by a leading donor to the Guyana economy, actually praises the country’s fiscal performance, completely ignoring the tax burden that the citizens of the countries making up that donor would regard as completely unacceptable given the low level of public benefits available in Guyana. In many of those countries the entertainment allowance is now denied at the corporate level and in Australia the Keating Tax Reform Package dealt an effective blow at non-cash fringe benefits.

Conclusion
But at the domestic level there simply is no need or pressure for reform. With perhaps a single exception, the top tier of the opposition political parties has shown no interest in tax reform, confirming the view that there is no ideological or class difference among the political elites. Labour has been emasculated by personal interests and petty rivalry exploited by, again, the politically powerful while Ann Jardim’s successor is just another of that elite.

The Ministry of Finance has been depressingly slow at taking any initiatives in tax policies. It has left these to the tax administrators, a fundamentally flawed position – the two roles and functions being obviously different. We need lower rates of tax both on individuals and corporate, removing not the loopholes but the chasms that in some cases discount the nominal rate of tax by as much as 75%. We need a society in which the fiscal benefits and obligations are shared and borne fairly by all and in which relief must not be sought in tax evasion.

Similarly, the President has allowed elements in the private sector to hijack the social and economic debate including tax reform. If any progress is to be made, then the hijackers will have to be brought into line. Failing that, we are left with an inequitable and dysfunctional tax system, high tax rates and massive evasion. That is in no one’s interest.