Sunday 17 October 2010

What taxpayers want

The Malta Independent on Sunday

What taxpayers want - 17.10.2010

While putting the last touches to the public budget for 2011, which will be read out in Parliament later this month, the Minister of Finance should keep in mind what taxpayers want and what they deserve.

It is not just a simple matter of taxpayers wanting lower taxes. Taxpayers in general understand that, in a civil and social society, taxes are and will always remain an indispensable source of revenue to fund essential but not commercially viable services (law and order, defence, education, health, social services and non-productive infrastructure, among others), as well as to finance the general functions of government. But, more than ever, taxpayers want value for their money.

They want to see their money being spent with transparency and high standards of governance. The government has no money of its own. It manages the country’s debt and assets, which are owned by all society. Governments come and go, but society remains. The government is simply an agent of society and it is the duty of the agent to act in the interests of its principal and to protect the interests of the principal like a good paterfamilias.

Taxpayers are fed up of seeing our country humiliated by the falling standards of governance typical in the operations of a third term government. The strong rebuke given by the EU for lack of governance in the evaluation and award of the Delimara power station extension contract is typical of a government getting too comfortable with managing its affairs and our money. If such low standards of governance prevail in a contract that was under the close scrutiny of the media and the Opposition purely due to its sheer size, then imagine what governance standards prevail in smaller expenditure out of the spotlight in more shadowy corners.

Take the answer given by the Minister of Finance regarding claims of conflict of interest of a member on the Enemalta Board of Directors who also represents the organisation’s insurance broker. The minister sees no conflict of interest because the broker was not the ultimate beneficiary of the contract and, as a broker, his job was simply to identify the best deal for Enemalta. What does it matter to the minister that brokers live by the commission earned on such insurance contracts?

The minister’s argument is like saying that Enemalta’s chairman can also be the local representative of the turbine supplier because the ultimate beneficiary is the manufacturer not the agent. Unbelievable!

It is true that some conflict of interest may be unavoidable and in such case the conflict could be managed through full disclosure and withdrawal from particular matters where such conflict of interest is evident. But it is clear that this government – that expected a high standard of ethics from Labour when in government – lowers these standards when the boot is on the other foot.

Taxpayers do not want the awful experience, which is frighteningly becoming all too frequent, of interminable traffic jams in key arterial bottlenecks. It is high time to accelerate not only the project for better public transport (including an underground metro system in the long term) to encourage the reduced use of private transport, but also to invest in Singapore-type multi-level traffic intersections.

Efficiency gains need these investments if we are to move forward. Taxpayers are also fed up with hearing both sides of the electoral divide proclaiming that our universal entitlements to free health and education will be protected, come hell or high water. Many taxpayers are paying twice, first through general taxation and then again for private health insurance or private health and education services. To many people, the public service for which they pay taxes is just not up to scratch. And it can never be up to scratch if it has to provide for universal entitlement. The result will inevitably be falling standards, long queues and other forms of subtle rationing. Quantity and quality rarely go well together and often it is either one or the other. So taxpayers look forward to the day when, as has happened in the case of pension reform, they are finally told the truth: that the present universal entitlements system is utterly wasteful and clearly unsustainable and that their taxes can be lowered through restructuring by shifting from universal entitlements to limited entitlement by appropriate means testing.

Lower direct taxes will eliminate the discrimination where earned income is taxed at a higher marginal rate than unearned income (a regressive system, if ever there was one!) and will stimulate efficiency and investment as taxpayers are empowered to retain a higher portion of their earnings. It will also stimulate higher participation, especially by married women, in the labour force. It could also lead to better tax compliance, if the cost of compliance falls below the risks and costs of non-compliance.

Lax tax compliance is unfair to honest taxpayers and higher compliance could deliver lower tax rates without reducing the tax take. A simpler tax system would provide for lower marginal taxes and the removal of all the complicated system of exemptions and special provisions accumulated over the years to mitigate the high margin tax rate on certain types of earned income. And, if all this will only be feasible by raising indirect taxation through higher rates or a widening of the taxable base, then this should form part of the package to ensure that we keep our public finances on the straight and narrow and keep cruising gracefully towards a balanced budget in the medium term. Some may argue that such a project would be unsocial and regressive. I strongly disagree.

The social dimension should mean that the State, through taxation, provides to each according to their needs not providing everything to everyone. The latter involves the present wasteful transfer payments, whereby taxpayers pay taxes with the right hand and receive universal entitlements with the left hand. By avoiding such transfer payments, the bottom line should be that more resources are left for government to devote to those who really need them, while more money is left in the hands of taxpayers who can be trusted to take care of their own needs better than the government can on their behalf.

Taxpayers are asking that the taxation system be reformed to stop the practice of paying twice for the same service. The minister has before him all the claims made by unions, business organisations, civil society, the Church and other individuals. It is time, however, that the minister listened to what taxpayers want because, in the end, it is their money.

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