THE early economic thinkers, while recognising that wealth creation is the harbinger for economic development, also argued that it must be accompanied by a fair tax system. Therefore, a progressive tax policy is necessary for equitable income distribution and greater social inclusion. But when Leona Helmsley, the rich hotel chain executive convicted of US Federal Tax evasion in 1989 stated that only the “little people pay taxes”, the chicken had finally come to roost. The burden of taxation on the poor is most telling, especially when Wall Street tycoon Warren Buffet can argue that he pays less tax than his secretary.

Tax policy has been a contentious issue of fierce ideological divide and political debate by politicians and policymakers. For example, higher taxes on the one percent rich has dominated all US presidential debates in the last three decades and remained the most contentious issue until today in the USA. This article looks at the role of taxes in narrowing income inequality and to, at the least, say something about our own tax system in Guyana.

Taxes are the price we pay for a civilized society (Oliver Holmes). The most orderly and stable societies in the world such as Canada, Sweden, Germany, etc, despite high rates, have fair, efficient and effective tax systems. Taxes should be progressive, which means that those with higher incomes should pay more. Taxes are the main source of government revenue and a very important component of fiscal policy. Tax revenue determines spending in social services providing education, health and essential public goods such as security.
The traits to good tax policy are economic efficiency, administrative simplicity, transparency, fairness and flexibility.
Noble prize laureate Joe Stiglitz (2013) stated that one of the reasons for poor economic performance is the large distortion caused by its tax system. Researchers in recent years have linked bad tax policies to sluggish growth and rising inequality. Stiglitz further argued, we can have a tax system that encourages hard work, thrift and discourage bad things like rent seeking, gambling, financial speculation and pollution. (New York Times 15/04/13). How people respond to tax incentives represent the bulwark of economic development.

An analysis of the tax revenue in Guyana showed that the bulk of the taxes are collected from Personal Income Tax (PIT), Value Added Tax (VAT), and Excise Tax. PIT is an important source of Guyana’s tax revenue. The PIT that is applied on income at source, on wage earners, is known as the Pay as You Earn (PAYE) and taxed at a flat rate of 30 percent in 2013 in Guyana. The PAYE was a progressive tax in the 80s with five tax rate brackets, however, in the early 90s it was unified with a single flat rate tax of 331/3%.

There was an attempt for a short period in the late 90s to re-introduce a limited progressive bracket but that was soon or later aborted.

It should be noted that the non taxable threshold was increased to $50,000 in 2012 and has preserved the incomes of thousands of low-income workers. However, it cannot be fair that some of the highest income earners pay no income tax. While it is cumbersome to have five tax brackets, there should be tax bands that represent elements of progressivity.

Further, the data in the Budget Estimates (2013) showed that the total tax revenue in 2012 was $119.4 billion or 20.5% of GDP. Income Tax accounted for $44.6 billion or 7.65% of GDP, broken down into Company Tax $24.4 billion or 4.2% of GDP, Personal Income Tax $16.2 billion or 2.8% of GDP while the Self Employed paid $3.4 billion or a meager 0.58% of GDP. Property Tax that includes Estate Duty was $1.9 billion or 0.33% of GDP while VAT collection was $34 billion or 5.85% of GDP.

The argument that the highest income bracket should be paying more is justified, especially when their incomes exceed by a hundred percent the country’s per capita income. Favourable treatment to any special group breads inequality and a loss of trust in the tax system. Recently, there was an increase in the number of companies that were successful, especially in mining. However, it is anybody’s guess that apart from royalties whether these companies are meeting their full tax obligations.
The self-employed category that includes private professionals such as accountants, lawyers, doctors, etc, as well as contractors, paid taxes equivalent to 0.58% of Guyana’s GDP last year. Further, the contribution of property tax to the public treasury is relatively low, since rent seekers and dodgy characters hide their wealth in real estate. It should be noted that the bulk of taxes are collected from the Income Tax, VAT and Excise Tax.

While there was a preference for better tax collection through indirect tax such as the VAT, it is not without burden. The fact that most basic food items are VAT exempt is commendable. However, there are other low income basic necessities like medicine that attract VAT. There are many low-income persons that simply postpone their health care to avoid cost. But VAT is structured to tax consumption as against production.VAT is also better designed to capture the value of services that is a significant share or 64% of Guyana’s GDP but still suffer from evasion and avoidance.
It is also pathetic that tax evaders, when caught, hardly feel the full force of the law. The famous case involving the “Polar Beer” fiasco will not be the first nor last case to suffer from a premature collapse in the court.
The IDB pointed out that even though countries of the Latin American and the Caribbean Region have strengthened their tax administration, the Region still take in less in tax revenue given its per capita income.
It estimated evasion to be around 17 percent of GDP in the Region. The IDB, in a recent flagship publication entitled “More than Revenue, Taxation as a Development Tool”, argued that taxation is one of the unfinished areas of reform in the Latin American and Caribbean (LAC) Region.
This IDB publication (2013) further argued that “smart tax policies will help us fight poverty and inequality, diminish the effects of climate change and improve private sector productivity.” It further stated that the LAC region is in need of pro-development tax reforms that should respect five basic principles. 1) The reform should include taxes that favour the poor; existing tax systems should be made more progressive and reduce the number of exemptions.2) Tax systems should be simpler with broader tax bases that will help create an environment conducive to innovation and business start up while promoting productivity. 3) Tax administration must be strengthened so that all citizens and businesses meet their tax obligations. 4) Reforms should ensure that local government can generate their own sources of revenues to match their increasing responsibilities as agents of development. 5) Given the LAC region’s extraordinary yet finite endowment of natural resources, tax systems should create incentives for their more efficient use, taking into account the development needs of future generations.
The publication correctly concluded that tax reform is the most unfinished policy area in Latin America and the Caribbean. It is important to note that despite the rapid strides of successive administration of the Workers Party of Brazil in narrowing income inequality, the recent popular uprising after a 50 cent increase in transportation cost has given much food for thought. Emerging market economies are threatened with similar social upheavals due to income inequality.
There has not been any major overhaul of the tax system in Guyana. The first attempt in 1962 by the early PPP government at major reform was by Nickolas Kaldor, a brilliant Cambridge-trained economist who came to Guyana at the behest of the United Nations. He sought ways of eliminating tax evasion and broadened the tax base, but that was met with opposition, especially by big businesses. Since then there were some piece-meal changes but not a total overhaul of the tax system as rent seekers and speculators continued to exploit loopholes in the system. The main intention of the reform proposal was the mobilisation of the country’s internal resource to finance its economic development rather than relying on external borrowing by the then Cheddi Jagan administration
Very early in his presidency, Mr. Donald Ramotar appointed “three wise men” to review our tax system that included the executive chairman of the company that led the opposition to the Kaldor reform with the famous “axe the tax” slogan after a half cent in tax on banks beer in 1962.
Since then, Kaldor became famous for successfully designing the tax system of both industrialised and developing countries. Hopefully, the “three wise men” can come up with ground-breaking proposals that will ignite production incentives and fiscal strength with its recommendations. Not much was heard from the work of the “three wise men’, but I remain optimistic that given the long time spent so far that the recommendations eventually will generate the potential for lasting development with greater social and economic equity.
Written By Rajendra Rampersaud

PULL QUOTE: Very early in his presidency, Mr. Donald Ramotar appointed “three wise men” to review our tax system…Hopefully, the “three wise men” can come up with ground-breaking proposals that will ignite production incentives and fiscal strength with its recommendations. Not much was heard from the work of the “three wise men”, but I remain optimistic that given the long time spent so far that the recommendations eventually will generate the potential for lasting development with greater social and economic equity.