Tax cuts are not the only answer

In presenting a bold proposal for fiscal reform, Opposition leader Simon Busuttil seems to be entering a new phase of what is (from the PN’s point of view) an ongoing election campaign.

Elections may be over a year away, but the Opposition has already announced that its electoral motors are running. Traditionally, campaigning focuses on two major platforms: turning up the political heat, as it were, on one’s adversaries; and remodelling one’s own party as a credible, forward-looking alternative government.

To date, Busuttil has been criticised for placing too much emphasis on the former, and not enough on the latter. He has been somewhat less convincing in proposing a national vision of his own. A strategic document for good governance was a step in the right direction; but as policy issues are increasingly drowned out by confrontational bickering, it was time to provide the electorate with a better reason for voting out the government, than just a list of its own defects and shortcomings.

From this perspective, Busuttil displays political nous when focusing on the most notoriously volatile electoral segment: the self-employed, who have collectively played the part of king-maker in virtually all recent electoral turnarounds. And while his proposal for a 10% reduction in income tax for small businesses may sound like a classic case of vote-fishing, there is certainly a case to be made for shifting the fulcrum of Malta’s current tax regime towards favouring the small at the expense of the bigger players.

As all recent governments have repeatedly emphasised (but rarely actually delivered on their many promises), small businesses are the backbone of a healthy economy. There are therefore sound economic as well as political reasons to try to ease the tax burden on this sector. It was Dom Mintoff’s failure to acknowledge this reality that drove small entrepreneurs into the arms of the PN under Eddie Fenech Adami in 1987; it was Alfred Sant’s promise to remove VAT that swung the pendulum back to Labour in 1996.

Likewise, Gonzi’s decision to increase electricity prices may not account for the extent of the 2013 defeat: but it was arguably the body-blow that sealed the overall result. 

Simon Busuttil is no doubt mindful of these realities, and it is not surprising that he would seek to swing the balance of power back in his party’s favour. But there are more than just the Nationalist Party’s fortunes at stake in decisions such as these. 

One consideration is the use of taxation as a means to incentivise good practice. The 10% reduction would be tied to the introduction of environmental measures, and to helping out charities or other non-governmental organisations. Busuttil also specified that the scheme would apply on the first €50,000 in profit made by any small business, but not to businesses that hire workers in precarious or other exploitative conditions. 

This raises a few questions: not so much for the PN, but for the country as a whole. In principle there is nothing wrong with linking tax benefits to certain conditions, but these conditions should clearly not include practices which are already mandated by law. Local businesses are already legally obliged to meet the basic employment conditions, and to avoid those that are exploitative. Are we suggesting, therefore, that basic law enforcement is so impossible that we must introduce tax incentives for businesses to comply? 

Another consideration is the role of taxation within the broader spectrum of government responsibilities. The PN’s tax proposal has been costed at €85 million; which translates into a significant loss of public revenue. Investment in health, welfare, universal childcare, infrastructure and public transport all depend on adequate tax revenue. Already we are witnessing an evolution in the traditional model of national welfare, with the introduction of private-public partnerships in healthcare. It is difficult to envisage how such a generous tax reduction can be achieved without enlarging the scope of privatisation of the welfare state.

Helping SMEs makes social and economic sense; but cutting taxes weakens social bonds, which is an integral part of social responsibility. Rather than slashing taxes, the focus should be on venture capital funds to promote innovation, coupled with greater emphasis on fiscal and social responsibility.

One way to help small businesses without hurting tax revenue is the creation of a lending fund, designed to incentivise banks to give loans and increase the limits on the amount that companies could borrow. Low interest rates can help businesses pay them back quickly while maintaining a good cash flow, expanding the overall domestic economy, and creating more jobs.

Moreover, governments should pay equal heed to bolstering tax revenue through cutting down on tax evasion. In recent weeks, a unit targeting tax evasion through a joint effort between the Inland Revenue, the VAT Department and Customs was set up. While this long overdue unit is welcome, we are still far away from making tax evasion a top priority, especially in the wake of the Panama Papers. 

Tax cuts for middle earners may make a lot of political sense, and Busuttil’s gambit may well pay off. It remains however a traditional approach, to an issue which would be better confronted with more innovative ideas.