Beneficiaries of tax cuts pay highest tax burden

Tonio Fenech's tax cuts for Malta's highest earners will affect a cohort that is already paying 81% of income tax nationally, raising questions of how any government in 2013 can expect to collect €83 million more in tax revenue as the Finance Minister has predicted.

2011 data for 126,000 self-employed and salaried employees supplied by the House of Representatives shows that the 49,500 taxpayers who earn upwards of €19,500 paid a total of €275 million out of €337 million in tax.

It is this section of the population that has been granted a long-awaited tax cut, first pledged in the 2008 programme for Nationalist re-election, with tax to fall from the highest rate of 35%, down to 32% in 2013, and falling to 25% by 2015.

Tax cuts in numbers

126,000 taxpayers (joint, single, parent) pay €337.4 million in income tax

49,545 (39% of taxpayers) earn upwards of €19,500

This last cohort pays €275 million, or 83% of this income tax

35,024 (27% of taxpayers) earn between €19,500 and €30,000

These pay €106 million or 31.6% of total tax burden

Only 3,814 declare earnings higher than €50,000 but pay €88.8 million or 26.3% of total tax burden

By 2015, these high-income groups will be paying 25% but government claims it will increase income tax by €83 million next year

The drastic cut specifically affects those earning between €19,501 to €60,000 - a population of self-employed and entrepreneurs, middle-management and professionals, but whose salaries are at the extremes of the allegedly 'wide' middle class.

As it turns out, the group that takes the highest tax burden in Malta are a particular cross-section of 35,000 'middle' income earners who declare salaries of between €21,000 to €30,000: these pay 31% of total taxes.

The second highest-paying taxpayers are those who earn over €50,000 (just 3,814 taxpayers) taking 26% of the tax burden.

The gulf that separates these two 'classes' of workers can be wide indeed, even though in the eyes of the PN these are voters who value economic stability, private enterprise and their personal social mobility.

Their counterparts in the civil service will not benefit from the tax cut: at salaries of just under €19,500, psychologists, judicial assistants, engineers, dental surgeons and auditors in public service will be paying the same 25% tax rate in 2015 as their private sector peers.

At the same time, Tonio Fenech predicts economic growth will be such in 2013 that government can collect €83 million more in income tax when it is slashing taxes for the major contributors to Inland Revenue.

Can this electoral tax cut lead to higher declarations and better tax collecting efforts?

Alternattiva Demokratika chairperson Michael Briguglio says the tax cuts raise questions of both social justice and fiscal sustainability.

"First of all, we have the anomaly of minimum wage earners having to pay some tax when high earners will get tax cuts.

"Secondly, how can government expect to collect €83 million more in tax next year? The rate of economic growth the country needs to generate such tax revenues is going to have be higher 1%, especially when the people who contribute the  most tax have been given tax cuts.

"These are not economic, but political measures: cutting taxes was the easiest thing a government could do before an election."

Eventually, the tax cuts and the drop in direct taxation revenue will have to be recouped. "It will be through higher income tax, or reduced public service. Certainly there will be repercussions," Briguglio says. "This budget is surreal in the political circumstances the government finds itself in, if it falls tomorrow: it should have never been presented, and it just creates more uncertainty."

Economist Alfred Mifsud is another sceptic of Tonio Fenech's claim that economic growth will reap more tax revenues from higher salaries.

"All things being equal, tax revenue should increase at the same rate as the growth of the nominal economy. So normally, tax revenue should increase by some 4% in 2013 - being 1.6% real growth plus 2.4% inflation," Mifsud wrote in his Independent column.

But all things are not equal: Mifsud says the revenue forfeited from the taxpayers who pay the highest volume in tax, "does not come cheap".

"How come government is still expecting tax revenue to increase by more than twice the rate of nominal economic growth? Budget 2013 is a horror movie we have seen before, further complicated by its regressive stand and by the increase in the share of taxation revenue compared to GDP."