Charge less - earn more

The Chamber of Commerce has regularly voiced its opinion on the country's financial predicament. In performing this task it endeavours to act with utmost responsibility with the interest of the country at heart.

In participating in the pre-budget consultation with its social partners and preparing its formal proposals, the Chamber is, this year, setting a number of priorities for the Finance Minister's consideration. The urgency for a strong economic kick-start features high on the Chamber's agenda as does the pressure to solve the national deficit and debt problems and the need to ensure fiscal equity across taxpayers and fair distribution of wealth across income groups.

For years on end, the Chamber has called for a reduction in the tax burden. It has continued to do so despite criticism from certain quarters that this would exacerbate the country's problems and lead to financial disaster. For about a couple of years, the Chamber has gone a step further and publicly mooted the idea of gradually harmonising the marginal tax rates applying to direct and indirect taxation within a pre-specified period of time. This measure would primarily serve as an incentive for investment and a stimulus to aggregate demand.

As the senior representative of the business community in the country, the Chamber claims with a strong degree of confidence that investors, both local and foreign, would respond very positively to a reduction in the marginal tax rate. This claim is backed by the numerous contacts which the Chamber has established over the years with international organisations and potential foreign investors.

The Chamber continues to believe that industry and business in general, as well as the greater majority of workers, are being highly taxed to the extent that the current tax policy is acting as a disincentive for effort, investment and innovation on the part of employers and a further disincentive for work and effort on the part of the local workforce. This is obviously detrimental to the economy due to the multiplier effect of investment on the rest of the economy particularly through employment. It is also affecting the economy in that a considerable number of people are tempted to perform undeclared economic activities. This triggers further abuse if social security contributions are included in the equation.

People who perform undeclared work may also continue to fall below the necessary thresholds related to social benefits. In the process they are therefore not merely depriving the government from its rightful tax revenue but also draining the same coffers with the social benefit they are unjustly receiving. This results in Malta being safely described as having a two-tier economy - a productive and tax-abiding section that drags behind it the burden of a large section of the population intent on living on free meals and others who do not contribute their fair share to the tax coffers. In certain cases there is a strong overlap between the latter two groups.

As the marginal rate of direct tax approaches that relevant to indirect tax, it is the Chamber's belief that the country would be heading towards achieving equality across taxpayers and fair distribution of wealth across income groups. If complemented by strict enforcement and control, several underground operators would be encouraged to regularise their position because tax evasion would be rendered less profitable and attractive. With more people contributing to the public coffers, the burden on the existing number of contributors would be alleviated. There would not be a risk of social injustice through a shift in the tax burden on lower-income groups because VAT is a progressive tax. Those who spend more (the higher-income groups) would, in practice, pay more tax.

Neither does the proposed measure pose any dangers with respect to the country's balance of payments through an increased import bill. As consumers pay less taxes on an individual basis, they are left with higher disposable incomes and their spending power increases.

Consumption patterns associated with middle-income workers, in particular, show that the marginal propensity to save as well as spending on services is positively correlated to income. Hence, apart from increased savings, extra spending would typically be channelled towards services which generally exert a relatively higher multiplier effect on the local economy due to a greater labour element compared to consumption of imported goods. If, through a lower tax burden, the country is successful in attracting investment which is geared towards foreign markets, Malta's balance of payments would actually be improved through an increase in exports.

Should the minister take up this suggestion, he would risk earning less revenue from taxes in the immediate short-term. Naturally, the country would need a brief adjustment period during which the state would be emitting the right message to the investor. It would then be up to the investor to contribute towards a kick-start of the economy once he is assured of a favourable business environment to operate in. The entrepreneur would be given a better incentive to invest his effort and capital on people, property, machinery and technology knowing that the climate in which he operates is now stable and fiscally fairer and more advantageous. The investor would, through this measure, be left with more money to invest after tax and would benefit from the fact that more of his counterparts would be tax-compliant, therefore competing on a level fiscal playing-field.

In making such recommendations, therefore, the Chamber is mindful that such a decision would constitute a serious dilemma for the Minister of Finance and Economic Affairs particularly in the light of the current public finances position and the programme for consolidation set in 1999. However, the government should be encouraged by the international experience of other low-tax economies such as Ireland and the United States which have significantly out-performed their trading partners in terms of economic expansion over the past decade or so.

The minister may look closer to home for encouragement in taking such a decision. The reduction in the maximum tax rate of income tax from 65 to 35 per cent in the late 1980s proved to exert a highly expansionary effect on the economy, stimulating work, investment, employment creation and, most importantly, prosperity and wealth.

The government is truly correct when it quotes the popular axiom that "the private sector is the motor of the economy" when the latter is expected to give commerce and industry the desired momentum to sustain the country's economic well-being. Nevertheless, the business community must be given the right signals and must bring about a sense of confidence that the current parameters and climate in general are stable and not subject to drastic changes in policy within a short period of time.

I am convinced that the earlier the government does its part, the sooner local and foreign entrepreneurs will respond by creating employment and performing yet another sequel in Malta's history of economic miracles.

I urge the minister to take the plunge, adopt a business-like and business-friendly stance, charge less tax and higher tax revenues would be guaranteed.

Mr Fava is the president of the Malta Chamber of Commerce