Friday, 20 March 2009

Show us the Money

 20th March 2009
The Malta Independent - Friday Wisdom

There is nothing outside sex that can produce instant pleasure more than receiving a tax refund. For some time I used to overpay my provisional tax bills for the joy of receiving a tax refund cheque at Christmas time. It’s strange because it was my money after all which I would had advanced to government interest free; but still, opening a tax statement with a cheque appended at the bottom made the joyful experience worthwhile.

So it is understandable that the prospect of recovering VAT paid on the past purchase of a car would appeal to many thousands of people who decided to queue up to join the class action which Labour will be bringing against government in local courts to be followed up as necessary through the EU judiciary system.

There seems to be growing conviction, running across party lines, that technically government was incorrect in charging VAT on the registration fee and that there is good possibility of government being forced to refund if the class action case is pursued through EU channels.

Such cases could take several years to work their way through the full process and with Labour having committed itself to give the refunds if were to be elected at the next asking, there may well be a case for Labour strategists to include this financial obligation in their fiscal plans as they may well have to foot the bill either through a Court decision nearer to election date or through execution of an expensive electoral pledge. If this issue is still pending by next election Labour will be asked to ‘show us the money’ to explain how they intend funding the e50m involved in honouring this pledge.

Given that the government seems quite isolated in defending this case on its technical grounds, my idea is to argue the merits of this case on more broad economic and moral views.

What is good for the individual may not be good for the whole economy. This is like Keynes’ paradox of thrift. While it is good for individuals to save for the future, if everyone were to adopt a herd mentality and cut spending and increase saving at the same time, they could well throw the whole economy into a serious recession. While it is good for the individual to claw back tax ‘overpaid’, if this spreads to several thousands involving millions of euros, what is good for the individual will not be good for the general economy.

After all, the government has no money of its own. It administers funds which belong to us all, mainly funded by current taxpayers or by borrowing which would be a burden on future taxpayers. So if the government is forced to refund tax to a selected few thousand who purchased a car since we joined the EU till the system was corrected in the Budget for 2009, then the benefit to these few would be a burden on the many. Is this a case of inverted socialism?

The EU framework provides for fiscal policy to remain subordinated to national jurisdiction with limited EU- wide regulation related to the application of VAT. Even if it is accepted that government was adopting a technically incorrect fiscal measure by applying VAT on registration tax, the core fundamental issue remains that these car buyers were fully aware of the bottom line price they were paying for the car they were acquiring and that government could have corrected the technical VAT issue and kept the same bottom line price purely by adjusting the excise duty or registration tax applicable on such purchase.

So while the government could have been technically in the wrong, it was fundamentally in the right whereas those who are technically correct in demanding a refund are fundamentally in the wrong as they liberally bought their car for a bottom line price they were fully aware of. This is nothing like the airport departure tax which applied discriminately against local residents and did not apply to visitors. This applied universally to all.

Even from a moral perspective, the class action struggles to find a justification. Government needs tax revenues to operate effectively and a good slice of this tax revenue has to be expenditure based. Putting undue weight on income based taxes would lead to high tax rates killing the incentive to work and leading to economic decay.

One of the most effective tax sources is indirect taxes loaded on to the price of big ticket items, especially those which have a discretionary element attached to them. Car purchases fit squarely into this category. On this traffic congested island 17 by nine miles, tax measures which apart from generating revenue also discourage excessive use of personal means of transport, make perfect sense. Should we upset this sensible tax orientation purely to exploit technical defects in past application of taxes that may not have been sensitive enough to the new technicalities introduced by EU membership? There is no moral justification for doing so.

It is a sad political reality that a party in opposition, free from the immediate burdens of administering the public purse, could score quite a few points of popularity if it hooks its fortune to a handful of issues which find mass appeal irrespective of their eventual consequences on the macroeconomic shape of fiscal responsibility. The risk is that if it pushes its luck too far pursuing such crusades, Labour risks being perceived as a party that functions more effectively in opposition than in government. And surely this is the last message that Labour would want to project on themselves from the point of view of the electorate.

So Labour could score well if this is a one off exception but should be careful not to search or attach themselves to other similar issues which in the end could lead to potential victories that can break the public purse and force additional tax burdens on future car owners. In substance I think this issue was better suited to individual MEP’s to show they have learned the EU ropes enough to bring government to the book, rather than to be used by Labour as a broad national issue which could come back to haunt them. Really this could be a case of be careful what to wish for!

Labour, to my eyes, are projecting themselves as much more appreciable government material in presenting their 20 point illegal immigration action plan. This is a subject I always kept considerable distance from because I have no specialisation on the matter, because it involves the life and death of fellow mankind, and because it is an issue where everyone is right and wrong at the same time.

Labour’s plan seems a fair effort to develop a national strategy which could unite us to present our strong plight before the international community which in many instances is just washing its hands off an issue which is its responsibility as much or much more than it is ours. We have never been colonial masters in Africa and we never appointed or removed despot dictators in African countries which cultivated the poverty culture that is forcing so many innocent souls to risk their lives to free themselves of their bondage.

To my mind it is imperative for a national immigration strategy to be achieved by consensus. The EU, and the world beyond the EU, will then know that we mean business and that their criticism about our detention centres not being shiny enough will not be taken seriously. For those who criticise us so unfairly
our curt reply should be ‘show us the money’.

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