System error

This article was published in the Malta Independent on Sunday 14.12.2014

The budget and its ensuing debate in Parliament have passed with an extraordinarily disinterested approach. Unfortunately, the whole saga leading to ex Minister Mallia's dismissal eclipsed its importance rendering its debate a non-event.

The dismissal followed exemplary due process which set high governance standards as Prime Minister Muscat had promised. Opposition demands for summary proceedings rather than due process shows political opportunism rather than high moral political ethics. In so doing, they seem to support the Sheenan mentality of shooting first and analysing later.

Mallia paid a high price for a common judgmental error. Mallia's decision to be fired rather than resign shows his strong personal conviction about the correctness of his behaviour. While one can fault his judgement one must respect his conviction.

This saga is a typical case of human inaptitude for managing the sudden metamorphosis from a highly successful career as private professional, to a top brass political executive. Change is so stark and sudden that its successful management demands training and coaching for a due level of preparedness which unfortunately is totally missing in our political system. We have a grave system error!

Mallia's decision to give up a highly successful private career to enter the much less rewarding and much more demanding world of politics is commendable altruism. Doing so and knowing that political success would attract thirst for vendetta from his former political stables that felt betrayed and deserted demanded self-sacrifice and a thick skin. 

The sudden switch however did not permit the mental adjustment from the criminal world, where there is high onus of proof on the prosecution, even in the face of suggestive circumstantial evidence, to the political world where even incomplete circumstantial evidence influences public opinion and places on the politician the onus to prove himself innocent.

The success of a criminal defence lawyer depends on influencing the judge and jury about the absence of proof of guilt beyond reasonable doubt. In politics, the judge and jury is public opinion that can be formed irrespectively of reasonable doubt.

Had Mallia experienced a transitory period as a backbencher or in Opposition, the adaptation to executive power would have been handled better. It is no coincidence that the two former dropouts from Muscat's Cabinet were similar candidates newly elected and immediately given a Cabinet role.

We speak so much about the need of lifelong learning to maintain our workforce competitive in the face of globalization and technological challenges.  It would not be amiss if new Members of Parliament and of Cabinet are subjected to intensive induction training to make their transition less traumatic than it has been for Mallia, Farrugia and Mercieca. The transition from successful private careers to political roles needs also to be subjected to due process; otherwise we would be scaring away real talent from politics.

Back to the more normal stuff, an economy growing at above three per cent in real terms, reducing budget deficit, a primary budget surplus, falling unemployment, rising labour participation and a stable balance of payments position presents a solid framework for planning the next moves on the economic chessboard. And the budget for 2015 did just that with an array of measures aimed to eradicate social benefit fraud, reduce dependency on social benefits and encourage economic activity.

However, there was one fiscal measure that breaks serious principles of tax policy which however has received, surprisingly, very little criticism. Text books of tax policy invariably preach that as a tool to foster economic growth, tax policy should be predictable, stable and non-discriminatory.

The tax policy change to render all sales of real estate property subject to withholding tax, irrespective of the underlying profitability, or lack of it, breaks all these three attributes of an effective tax policy.

The change was anything but predictable. Property ventures are long term in nature and investment could be scared away if the applicable tax system is changed mid-stream. Any such change should have been applied only to sales of property acquired after its announcement if the virtue of tax predictability was to be protected.

It has destabilized the market. Vendors who were banking on selling under Capital Gains Tax (CGT) rules suddenly find that they may have to pay a withholding tax, varying between five per cent and 10 per cent even if no profit is made on their property deal (as is mostly the case for property bought at the peak of the market in 2006/2007).

And it discriminates between property developers. Those who sell property held for more than 12 years will see their tax bill reduced from 12 per cent to 10 per cent of the sales value. Developers who sell property acquired nearer to the market peak of seven/eight years ago and who relied on getting full or partial refund of the seven per cent CGT paid on contract, will now have to pay eight per cent of sales value on a final withholding basis even though in effect they would probably not have made any profit on the deal. For them this is not income tax or capital gains tax; it is excise duty irrespective of the profitability of the transaction.

The property sector is too important to be subjected to such shocks and instability. The convenience of collecting revenue by a simple withholding tax charge applicable universally irrespective of profitability should not overwhelm the necessity to keep taxes predictable, stable and non-discriminatory. Taxes have to be fair not just convenient.

Property deals under the new tax regimes are now exempt from all profit taxes but subjected to an excise like tax of 10 per cent, 13 per cent or 15 per cent, of which five per cent is payable by the buyer and the rest by the vendor. No other asset class receives such discriminatory treatment. This must be another system error!