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WHAT MATTERS MOST: Tax changes too steep


DR CLYDE MASCOLL, [email protected]

WHAT MATTERS MOST: Tax changes too steep

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OF All the missteps made by the current Government over the last eight years, the tax reform measures introduced in the June 2015 Budget must be the worst. The effects of these measures will be fully recognized as Barbadians file their income tax forms for income year 2015.

It took decades for respective governments to reform the income tax system to a point where there was evidence of specific principles influencing the process. Two major tax reforms occurred in 1986 and 1992. The former may be said to have been more politically inspired than the latter.

In the 1986 reform, the motive was to reduce the taxes payable by all taxpayers and it did at a cost to the treasury. In the 1992 reform, under the instruction of the International Monetary Fund (IMF), the motive was quite the opposite. However, the phased approach to the reform resulted in the middle-income groups paying higher effective tax rates, while the $100 000 income group and above experienced some reduction in their rates.

In the years that followed, the Government’s focus was on boosting savings, including special deductions for pension fund contributions, and approved annuity and retirement savings plan contributions. It also sought to encourage investment in venture capital funds, mutual funds and new shares in public companies. In addition, along with the standard deduction for taxpayers being systematically increased, home improvements for owner-occupied property were supported.

It is well documented that the tax reform trajectory after 1992 in Barbados focused on the principal goals of improving the efficiency, equity and simplicity of the tax system. Of these, simplicity is the easiest to demonstrate. The elimination of levies and other minor income taxes, such the stabilisation tax, simplified the administration of the tax system. The introduction of two marginal tax rates and the standard deduction for income taxpayers also simplified the system.

In addition, several of the itemised deductions were removed, which eased the administrative burden on the staff of the Inland Revenue Department.

The authors of Barbados’ most recent tax reform study noted “concerning the taxation of individuals, the current tax has many attractive features. There is however scope to make it a fairer and more efficient revenue raiser”. The notion of what is fairer ought to be informed by the objectives of the Government. For example, does the Government want to encourage savings, investment and home ownership? The answer to this question is what matters most in income tax policy.

It is quite clear from the measures introduced in last year’s Budget that the Government had one intention and it was to raise more revenue from the taxpayers. Even though there was little clarity in the presentation from the perspective of the timing of implementation, there was never any doubt with respect to the purpose of the reform.

It must however be mentioned that the authors of the tax reform study recommended the conversion of major deductions and allowances into equivalent tax credits at the lower tax rate. The Government ignored any such recommendation, thus reinforcing that its only aim was to raise additional revenue. Furthermore, the recommendation was to be phased in over the next one to three years. The Government opted to do it all at once.

So merciless is the Government toward Barbadian taxpayers that the reform study suggested that “the reverse tax credit should be maintained if it can be administered effectively and enhanced to compensate lower-income families as the base for the VAT is broadened”. The Government chose to abolish the reverse tax credit. This speaks volumes about the mindset of the Government with respect to the tax system being purely a revenue raiser. This kind of thinking is at variance with all previous efforts at tax reform in Barbados.

In the face of all the sacrifice asked of Barbadians over the past seven years, there is evidence of ongoing decay in the fiscal performance of the Government. This was temporarily denied by the minister of finance, who eventually admitted, as is now his wont, that his original words were incorrect.

It is one thing to sacrifice for a cause, but it is quite another thing when the cause of the sacrifice keeps on changing. At one stage, the cause was fiscal consolidation. It turned into the protection of the country’s foreign reserves. It is now to maintain our social services.

On the current path, there is a bigger case for which Barbadians have to sacrifice and that is the health and wealth of the country.

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