The best way for any Government to raise revenue is via economic growth. This was best exemplified in the post-IMF programme of the early 1990s which witnessed almost 14 straight years of growth, averaging about 2.5 per cent per annum.
Apart from the sustained economic growth, the international financial sector emerged as the country’s second largest contributor to foreign exchange earnings and equally accounted for almost 65 per cent of the Government’s corporation taxes. The two accomplishments allowed the Owen Arthur administration to reform the direct tax system following on the initiatives of the early 1990s.
In addition to lowering the income tax rates, the tax-free income threshold moved from $15 000 to $25 000, thus easing the effective tax rates of all income groups in the 1990s and beyond. Coincidentally, the change of Government in 2008 was immediately accompanied by a change in the policy of income tax reform.
Perhaps the change in policy is best seen in (1) the removal of allowances for individuals, converting bonuses into bonds, debentures, stock of the Government of Barbados or mutual funds; and (2) the removal of $10 000 allowance for investment in shares of co-operative societies, new public companies and mutual funds.
These measures are intended to discourage investment by making individuals pay more taxes resulting from higher taxable income.
These changes in policy have been compounded by the taxing of allowances, which has reduced the take-home pay of public and private sector workers.
Recent information has revealed that the after-tax income of individuals affected by the imposition of taxes on allowances in 2011 was devastating. An individual who earned $4 000 per month, of which $1 000 was in allowances, paid only $183 in taxes. This is because $2 083 per month is tax free.
Once the Government put taxes on allowances, the same individual paid an additional $200 per month in taxes.
At the extreme, an individual with maximum monthly allowances of $1 250, who is in the 20 per cent and 25 per cent tax categories, paid additional taxes of $250 and $312 respectively.
At the time when this tax on allowances was introduced, food prices were skyrocketing; electricity bills were going through the roof; other utilities were also increasing; insurance costs were on the rise; local gasoline prices continued to increase faster than international prices and living costs in general were climbing. Nothing changed in 2011, except the rate at which prices continued to increase.
On a fixed income, the burden on taxpayers has been tremendous. All of the above policy changes were induced by the excessive spending of the Government, which accelerated in 2009. This acceleration forced the Government to extract every cent from taxpayers, which is why a middle class crisis has accompanied Government’s fiscal crisis.
Since Barbadians have had less money to take home, the total spending in the economy declined in 2010.
Although the Government was aware of the decline in spending in the economy in 2010, it still introduced policies to further reduce spending in 2011 and beyond. This new policy direction could only be found in the same textbook that espoused “Kellmanomics”.
The basic intent of income tax reform in the 1990s was to put more money in the hands of individuals who are better able to make decisions about saving and consuming. Once they have money to spend, the Government collects more expenditure taxes, that is, VAT, and businesses have more turnover with the likelihood of making more profit, which translates into more corporation taxes.
The best way for the Government to raise more revenue is via economic growth and since Barbadians account for 76 per cent of the spending, it makes sense that stifling their spending is ignorance, especially when the country has adequate foreign reserves.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email clydemascoll@gmail.com.