Rewarding the hard-working middle class: a permanent tax cut

Maltese workers started receiving their tax refund cheques last week, with an accompanying letter claiming that this is government’s way of ‘rewarding hard work’.

The refund was an electoral pledge made in 2017 and retained by the current administration. It is paid to all workers earning up to €60,000, with those on the lower rungs receiving more than those in the higher wage brackets.

The intention was to provide ‘tax relief’ that benefitted mostly those on low incomes – indeed, recipients include even those who pay no taxes at all, because they fall below the taxable income threshold.

The argument back then was that because of the progressive nature of income tax, a traditional adjustment in brackets would mostly benefit those with higher incomes. The refund model, government argued, was more socially just in the way the money is distributed.

The individual cheque amounts have since been increased with the total outlay this year amounting to €26 million – not an insignificant expenditure. But with €26 million more in people’s pockets, the refund is an injection of sorts in the economy.

This leader will not rubbish the scheme; but there are three points that require reflection.

The first considers the intention to reward ‘hard work’. This rings true for salaried employees who have their tax deducted at source. These workers pay their tax dues with every paycheque of hard-earned money they receive from their employer.

However, this cannot be said for everyone. Tax evasion remains rampant at every level: from self-employed service providers who provide no fiscal receipts; to restaurants that surreptitiously provide customers with non-fiscal receipts; from companies that declare losses every single year, despite having a healthy turnover; to employees who ask their bosses to pay part of their wage in cash, so as not to declare the full amount.

Tax evasion is costing public coffers hundreds of millions in lost revenue every year – revenue that could be put to good use by the State.

A concerted effort to curb tax evasion will ensure the State has enough resources to sustain public services, widen social programmes and invest in infrastructural projects. With several sectoral agreements in the public sector coming to an end, government is currently negotiating new collective agreements that will inevitably lead to a higher expenditure: especially in a context of rampant inflation.

To finance generous wage increases, the government needs to source new funds; and a clampdown on tax evasion could provide those additional resources to sustain wage growth in key public services.

The second point regards the judicious use of public funds. Splashing out on unnecessary consultancies, or even ones that have been invented to reward government supporters, sends out the opposite message to the more frugal tone adopted by Finance Minister Clyde Caruana.

Government has to lead by example. Curbing on consultancies, direct orders and unnecessary recruitment in ministries might not save the country hundreds of millions; but it would give the government a morally convincing argument to get tough on tax evasion.

Additionally, Caruana must carry out periodic spending reviews of the different ministries to ensure that money which has been voted is used correctly and efficiently. If money allocated to individual ministries remains unused - or worse, is used irresponsibly - then Caruana should trim budgets.

The third point concerns the need to give middleclass families a meaningful breather through a permanent tax cut. The reduction in utility bills in 2014, the introduction of free childcare services, the drop in the top rate of tax to 25% for those earning up to €60,000: all these measures served to give the hardworking middleclass a boost in disposable income.

The positive impact of these three measures alone was immeasurable coming after years of austerity.

However, the longevity of those measures has now come to an end. Disposable income is being eroded at a fast rate because of inflation. It is true that government’s hefty expenditure on energy and fuel subsidies has cushioned the blow. These should be retained; although government should also start a gradual weaning off process, especially in fuels, to ensure the sustainability of public finances in the long term.

But this leader believes the time has come for a more significant overture towards middle income earners – the backbone of this country’s economic success – that rewards them with something more significant than a one-off cheque.

The non-taxable portion should increase, while the current top rate of 25% for those earning less than €60,000 should drop to 15% for a substantial portion of middle income earners. The government could also introduce a new 20% rate to differentiate the mass of people that currently pay at 25%.

This will inevitably create a shortfall in income for government but if introduced gradually and coupled with a concerted effort to curb tax evasion, much of the lost revenue can be recouped. But revenue can also be beefed up with higher excise taxes on fuel - an environmental measure to encourage people to use public transport which is fully subsidised.

In brief: The middle class needs a fresh impetus that truly rewards its hard work.