9th February 2006
The Malta
Last week I argued that
our economy is continuing to perform below its true potential and registering
much inferior growth rates than what is being achieved by the new members of the
EU with whom we have to compete both for trade as well as for attraction of
foreign direct investment.
I argued that the main reason for this is the lack of flexibility in our labour market and the discrimination we scandalously permit whereby public sector employees enjoy the best job protection while private sector employees with a much higher record of efficiency operate with little or no job protection.
This week I propose to push the argument one step further and suggest that a second condition necessary to achieve growth rates approaching our true potential, has to be a fiscal reform which almost no one seems willing to discuss, let alone implement. I am not referring to pre-election trimming changes to income tax bands and allowances meant to return some spending power back to the consumer after being tax oppressed in the post-election years. These peripheral changes in no way address the core need of a deep fiscal reform.
It is not possible for the state to provide free universal social services, including free education right up to university, stipends to all university students, free health services in state hospitals and health centres, and state pensions to all post-retirement without time limits until death and many other social payments, without incurring unhealthy and unsustainable fiscal deficits, or without levying a rather high level of taxation from the private sector in order to fund these expensive services.
In the not too distant future we will have to face the economic reality that these services can only be affordably provided by the state on a means-tested basis for those who really need them.
The Prime Minister was asked last weekend whether the transfer of hospital services from St Luke’s to Mater Dei would still allow health services to remain universally free as at present. The answer given was a well-organised fudge where the Prime Minister, in this highly sensitive pre-election period, reiterated that his government gives priority to keep such services universally free.
The journalist should have been more demanding and asked the Prime Minister whether he was giving a guarantee that they will remain so for the next legislature, or whether he was keeping the door open for the introduction of a system of co-payments by consumers of health services as has long been suggested by the monetary authorities for the sake of achieving a permanent state of health for public finances.
I feel quite sure that in a post-election mode, reality will prevail over wishes and many services which are currently universally available free of payment will only remain so to those who pass some form or other of a means test.
Means-testing will become the centre-piece for the distribution of social payments. But how can this be realistically and fairly possible when we still have a very low level of tax enforcement and tax compliance making means-testing on a tax-declared basis a very unreliable measure of who truly deserves to receive social assistance?
Without a fairly high degree of tax compliance, means-testing as a basis for social payments could create grave injustices giving further incentive for tax evasion. We could well finish up denying social assistance to who really deserves it and needs it, and instead issuing social payments to those who do not really need them but may appear so through their facility to avoid tax compliance.
Taking this argument further how can we achieve a high degree of tax compliance in a relatively short time in order to achieve a reliable system of means-testing on which to base future social payments to meet actual needs?
One option is to hire an army of tax inspectors, auditors and investigators. This will be counter-productive. It will cost too much, reduce the incentive to invest and ultimately work against the ultimate objective of reaching higher rates of economic growth.
A more effective way would be to reform taxation on a flat-tax basis reducing the marginal rate of tax to a level low enough to make it cheaper for the tax-payer to comply than to evade.
I can hear all sorts of arguments that flat-rate taxation is regressive and unsocial. This could well be so.
But I argue that it is less regressive than the present system we have where tax compliance is sub-standard and low-income earners finish up paying in tax a much higher percentage of their earnings than others who earn much more but declare much less.
The case for flat-rate taxation should not be aborted simply because it is theoretically tax repressive.
It has positive features mostly in stimulating tax compliance and investment and in providing a reliable platform for reforming social payments on a means-tested basis.
I argued that the main reason for this is the lack of flexibility in our labour market and the discrimination we scandalously permit whereby public sector employees enjoy the best job protection while private sector employees with a much higher record of efficiency operate with little or no job protection.
This week I propose to push the argument one step further and suggest that a second condition necessary to achieve growth rates approaching our true potential, has to be a fiscal reform which almost no one seems willing to discuss, let alone implement. I am not referring to pre-election trimming changes to income tax bands and allowances meant to return some spending power back to the consumer after being tax oppressed in the post-election years. These peripheral changes in no way address the core need of a deep fiscal reform.
It is not possible for the state to provide free universal social services, including free education right up to university, stipends to all university students, free health services in state hospitals and health centres, and state pensions to all post-retirement without time limits until death and many other social payments, without incurring unhealthy and unsustainable fiscal deficits, or without levying a rather high level of taxation from the private sector in order to fund these expensive services.
In the not too distant future we will have to face the economic reality that these services can only be affordably provided by the state on a means-tested basis for those who really need them.
The Prime Minister was asked last weekend whether the transfer of hospital services from St Luke’s to Mater Dei would still allow health services to remain universally free as at present. The answer given was a well-organised fudge where the Prime Minister, in this highly sensitive pre-election period, reiterated that his government gives priority to keep such services universally free.
The journalist should have been more demanding and asked the Prime Minister whether he was giving a guarantee that they will remain so for the next legislature, or whether he was keeping the door open for the introduction of a system of co-payments by consumers of health services as has long been suggested by the monetary authorities for the sake of achieving a permanent state of health for public finances.
I feel quite sure that in a post-election mode, reality will prevail over wishes and many services which are currently universally available free of payment will only remain so to those who pass some form or other of a means test.
Means-testing will become the centre-piece for the distribution of social payments. But how can this be realistically and fairly possible when we still have a very low level of tax enforcement and tax compliance making means-testing on a tax-declared basis a very unreliable measure of who truly deserves to receive social assistance?
Without a fairly high degree of tax compliance, means-testing as a basis for social payments could create grave injustices giving further incentive for tax evasion. We could well finish up denying social assistance to who really deserves it and needs it, and instead issuing social payments to those who do not really need them but may appear so through their facility to avoid tax compliance.
Taking this argument further how can we achieve a high degree of tax compliance in a relatively short time in order to achieve a reliable system of means-testing on which to base future social payments to meet actual needs?
One option is to hire an army of tax inspectors, auditors and investigators. This will be counter-productive. It will cost too much, reduce the incentive to invest and ultimately work against the ultimate objective of reaching higher rates of economic growth.
A more effective way would be to reform taxation on a flat-tax basis reducing the marginal rate of tax to a level low enough to make it cheaper for the tax-payer to comply than to evade.
I can hear all sorts of arguments that flat-rate taxation is regressive and unsocial. This could well be so.
But I argue that it is less regressive than the present system we have where tax compliance is sub-standard and low-income earners finish up paying in tax a much higher percentage of their earnings than others who earn much more but declare much less.
The case for flat-rate taxation should not be aborted simply because it is theoretically tax repressive.
It has positive features mostly in stimulating tax compliance and investment and in providing a reliable platform for reforming social payments on a means-tested basis.
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