There is perhaps no policy pursued by this Democratic Labour Party (DLP) administration that has been more unpopular among the so-called “middle classes” than the removal of allowances on entertainment, travel and housing.
These measures were imposed in a Budget designed to provide a much needed boost to Government’s revenues. However, the Opposition has consistently opposed these changes from the perspective of the hardship caused. The simplistic approach taken by both sides, contrasting the “need” with the “pain”, has denied us the opportunity to consider the matter of tax allowances philosophically.
Certainly, such an attempt was made by Minister of Finance Chris Sinckler in his presentation, but his references were lost within an overall focus on austerity and structural realignment, which is neither surprising nor unreasonable.
In an effort to establish the “rightness” of the discontinuation of these allowances, it is first necessary to consider the philosophical basis of our entire tax structure, which devolves from the orientation of both political parties in Barbados.
Socialist slogan
As socialist parties, the DLP and Barbados Labour Party (BLP) would both subscribe to principles of progressive taxation which speak directly to the socialist slogan “from each according to his own ability, to each according to his own need”.
Naturally, the DLP and BLP would disagree about the extent to which this principle is reflected in their individual policies, but both should agree on the priority of such a principle.
In simple terms, this means that those earning less and therefore needing more should pay less and receive more from the state, while those earning more and needing less should pay more and receive less.
Some proponents of the “flat tax” have argued that a simple tax of 20 per cent across the board would go some way towards achieving this principle since a person earning $100 would pay $20, while one earning $1 000 would pay $200. In Barbados and most other countries that identify with progressive taxation, we reject this principle since we believe that an individual earning $100 can ill-afford to part with $20, while a person earning $1 000 can perhaps afford to part with more than $200.
Consistent with this thinking, we have always taxed people who earn more at a higher rate (percentage wise) and completely shielded those at the bottom of the pay scale from income tax altogether. This is a principle that both the DLP and BLP have adhered to, although over the years both parties have tinkered with the rates and adjusted the level at which no tax is payable.
Two deviations
There have been two possible deviations from this general principle outlined above and in both instances there has been agreement. The DLP conceptualised and initiated work on the introduction of the VAT in 1993, which was later introduced by the BLP.
This is one of the major deviations from the progressive taxation principle since everyone paid 15 per cent and now pays 17.5 per cent. Indeed, this type of taxation is considered regressive since fundamental items like foodstuff that everyone uses attracts the same dollar value in tax regardless of the income level of the purchaser.
It is for this reason that the BLP subsequently introduced the VAT rebate which effectively handed regressively collected VAT revenues back to those most vulnerable. The DLP also appears to support this principle since it has not deviated from it.
Land tax
Other less obvious reflections of our “progressiveness” regarding tax policy can be detected in the manner in which we treat land tax, which technically should speak to property value and assess the individual accordingly. We have, however, realized that some people find themselves living in valuable properties through no direct action on their part and such persons would be unwittingly forced to pay higher taxes.
As such, it is now possible in Barbados that two people who occupy property that is similarly valued can pay tax on those properties at different levels since one is an able-bodied working person and the other is retired. The assumption here also is that both the need and the ability of the pensioner is different and concessions need to be made in that regard.
The other major deviation from this principle of progressive taxation is (was) the non-taxable allowance which is the subject of this article. It effectively allows a person in a higher tax bracket to escape his customary responsibility with respect to monies paid to cover housing, entertainment and travel.
The net effect is that this person takes home more money than he (or she) otherwise would and over the years salary packages of those in higher income earning brackets were effectively “tailored” to facilitate maximum allowances and consequently a higher pay packet.
It is against this background that I fully support the minister’s efforts to bring our tax structure back into line with the “progressive” philosophy for several reasons.
The first and most important is that there is no evidence that those who previously received such allowances actually used those monies for the purposes for which they were intended.
As a former lecturer at the University of the West Indies, I once received an entertainment allowance and felt compelled to entertain my students each year, while several of my colleagues did no such entertaining and considered this extra money part of their regular income, using it for whatever purposes they saw fit. This is not unusual and it would be administratively challenging to force people to demonstrate that allowances were used for the intended purposes.
The other more important reason comes from an appreciation of the fact that allowances which are exclusive to one income group presume that people who are not within that group do not also have similar demands for which no relief is offered. As such, all of us have to live somewhere, travel to work and in most instances entertain; hence, it is logical to ask why only some are granted relief.
To appreciate the issue, one has to separate the allowance from the “reimbursement”. Certainly, it is not my intention to support the taxing of a reimbursement of an employee’s money spent on travel or entertainment that is in the line of work.
Instead, the argument is being advanced that if all of us need to “reach” our place of work via car or bus, then all of us should similarly bear the expense associated with this necessary travel. Moreover, if an allowance is being offered to high-income earners, then why should low-income ones not also benefit from these allowances since their need is greater?
Ironically, both political parties would at different times find comfort with these principles. However, this is not the time to pursue political consensus. If the minister has the testicular fortitude to stand by this policy and not reintroduce the allowances, it is highly likely that future ministers of finance will maintain this policy, which is demonstrative of its inherent logic.
• Peter W. Wickham (peter.wickham@caribsurf.com) is a political consultant and a director of Caribbean Development Research Services (CADRES).
