Business Page – April 29th, 2001


A Time to Tax

Introduction

There are at least two reasons why Business Page should address the ever -present question of taxation today. The first one is that tomorrow is April 30, the final date for submitting income, corporation, property and capital gains tax returns and the date for paying any balance of taxes. The post-elections activities have created havoc with the preparation and audit of financial statements and the preparation of tax returns. Understandably, the Revenue Authority will be keen to catch up on lost revenue but hopefully it will take the dislocating activities into account in dealing with late filers.

The second one is that the Finance Ministry is now consulting with stakeholders in the run-up to Budget 2001. President Jagdeo has already pre-empted the process by announcing that there will be no new taxes in the Budget. In the absence of any explanation one is not quite sure whether the President means that no tax measures will be proposed or whether his statement should be taken to mean that on balance he is satisfied with the current structure and rates of taxes.

For years now successive Budget speeches have been littered with pronouncements on plans to reform the tax system to make it fairer, more efficient and less prone to evasion. Except in the very early years of the Economic Recovery Programme, those plans have remained just that and indeed some early steps have since been reversed. By the measure of tax/GDP ratio, Guyana continues to be one of the most heavily taxed countries in the world. The ratio has been falling but pressure on the government to increase and improve the quality of public goods demands increasing revenues. On the other hand businesses in their struggle to survive need to retain as much cash through lower taxes and other relief to help them afloat. The Finance Minister is facing a real dilemma.

The FTAA and taxes

Guyanese can be forgiven for their recent pre-occupation with domestic matters and for not realising the implications of the decision to establish the Free Trade Area of the Americas within the next five years. The Guyana Government seems irrevocably committed to membership although most people in the private sector seem unaware let alone prepared for this giant step. With so little world-class product to offer the gains accruing to Guyana from membership will not materialise for a considerable time. Unless there are some dramatic and revolutionary changes in the structure of the economy, we will have little to export other than the commodities that have served us in some cases for centuries.

What we can be certain about is that the rules of the club will require us to lower taxes and tariffs on imports from FTAA member countries. The country will have to compensate for the loss of revenue from those imports by raising the revenue from domestic sources. Already tax rates are far too high and there is no question that we will simply have to widen the tax base by bringing into the tax net income, assets and goods and services that do not now contribute anything to the Treasury.

The ideal

Any tax system is a mixture of historical, revenue, social, political and economic considerations. One of the foremost publications on taxation in developing countries noted that “the best approach to developing taxes in a developing country - indeed in any country - is one that takes into account taxation theory, empirical evidence, and political and administrative realities and blends them with a good dose of local knowledge and sound appraisal of the current macroeconomic and international situation to produce a feasible set of proposals sufficiently attractive to be implemented and sufficiently robust to withstand changing times, within reason, and still produce beneficial results”.

If we could re-create the tax system, the recipe identified above would no doubt make the ideal system. The current system reflects the extent to which political considerations affect tax decisions and have distorted economic decisions. Let’s take a few examples: Changes to the Income Tax (in Aid of Industry) Act to include fridges and stoves, ceramics and sanitary napkins were made to aid businesses operated by persons sympathetic to the then administration while perhaps the most outstanding example of politics influencing a tax decision is with relation to the Beal Deal.

The political challenge

Success in obtaining concessions and reliefs depend on the lobbying influence of those who seek them and such relief is usually an acknowledgement of the weak viability of the particular project. It should therefore have come as no surprise that despite such attractive fiscal and other concessions, many of those businesses failed.

In 1994, the government made the very sensible decision to abolish tax holidays but re-introduced them four years later. Tax holidays should be granted very sparingly since all incentives including tax holidays and remissions and exemptions only serve to narrow the tax base from which all revenues are derived, distort the allocation of resources, lack transparency, necessitate high rates, make evasion a risk worth taking, and lead to further calls for relief. Tax reform will inevitably result in winners and losers but the litmus test is whether the economy becomes stronger. It is understandable that no one will willingly give up existing concessions or agree to new taxes being imposed on them. The political challenge lies in persuading those who perceive themselves as losers to accept changes in the interest of the wider economy.

As we noted above, even prior to 1992, the tax system has been used not only for revenue collection purposes but also to help individual entities and to facilitate government intervention in the economy. This is a dangerous practice and the laws that allow such intervention should be amended. Taxes should be a matter for Parliament, not politicians.

The political compromise of our tax system has led to a situation where major international companies in the extractive industries pay no taxes whatsoever. This means that the sitting ducks - employees, large companies and increasingly consumers - have to pay for the lucky ones.

Integrated approach to management

But there are other dimensions as well. Taxation is more than just the raising of revenues. It is an important tool of economic management. This means however that our economic analysts require a proper understanding of tax bases and structures. Annual tinkering with the tax system creates uncertainty for the taxpayers and headaches for the planners.

Economic management requires an integrated approach but often our planners place trade, industrial and revenue policies in separate compartments. Trade and investment policies are often guided by an overriding desire to see factories facilitated by concessions that the economy finds difficult to sustain in the medium term. Later entrants insist on similar treatment so that while business activities increase, the tax base narrows. No study has ever been done to evaluate the cost/benefit of these incentives although despite the clear need for one.

Policy makers must realise that tax policy suffers from the same conflicts as the economic policies of which it forms a part and consequently they are both affected by the ideology of the government of the day. Governments must understand that this lack of consistency has serious implications for the private sector which becomes hesitant in making investment decisions for fear that an otherwise viable investment could be rendered unprofitable due to changes in tax policy or rate.

Conclusion

As stakeholders make their reverential trek to the Minister’s door they will be at a severe disadvantage. They have no idea of the government’s spending plans, its policies or commitments. They will make submissions similar to the ones they made last year and the years before only to be told that their submission cannot be entertained because they did not indicate how any lost revenue would be made up or that their submission is made too late for inclusion in the Budget. The Minister has an excellent opportunity to demonstrate that the consultations are more than a meaningless ritual and that he really takes them seriously.

As part of the budget preparation the Minister should have his team review the Budget Speeches for the last twelve (12) years to identify all unfinished business and unkept promises. Not only will this exercise alert him to the sterility of idle promises but they may also make him far more cautious in making new ones. The events of the past few weeks have obviously narrowed the room for maneuver and flexibility. But at the very least the Minister should announce the establishment of a National Commission on Tax Reform to report back to Parliament within nine months so that its recommendations can be fully implemented in the 2002 Budget. Business Page humbly recommends that this item be put on the agenda of the dialogue taking place between the President and the Leader of the Opposition. There should be no disagreement since both the PPP/C and the PNC/R have repeatedly expressed commitment to tax reform.