I am very dismissive of Kellmanomics, so I was surprised to learn that its author accused me of agreeing to a VAT rate of 20 per cent some years ago.
On the contrary, I warned the author that abolishing income tax in Barbados was not on the cards and that to do so would mean having to increase the VAT rate to 25 per cent, not to 20 per cent as he suggested.
The issue of abolishing income tax is not limited to the thinking of Kellmanomics; fortunately it is much more worthy of greater intellectual rigour than that school of thought portends. The matter is first and foremost an economic issue which, like most other policies, rests ultimately in the hands of the politician.
This is where economics takes the blame; there are economic solutions but they may not be politically palatable.
The design of a country’s tax system is based on a number of principles among which fairness, simplicity and revenue sufficiency are but a few.
However the choice between direct and indirect taxation is also very much tied to the structure, and to a lesser degree, the size of the economy.
A direct tax is a tax on income (personal income tax) whereas an indirect tax is a tax on expenditure (VAT).
In the case of Barbados, the economy is small, open and vulnerable. Small relates to the country’s size and its population. Open refers to the high level of trade in goods and services with the rest of the world. Vulnerable means susceptible to external shocks.
Of the many compelling reasons for retaining income taxes, I have chosen two: (1) fairness and (2) revenue stability. The income taxation is progressive in the sense that: those most able to pay; pay the most.
It also has the added features of an income threshold below which no tax is paid and two rates with the higher one on higher taxable income.
In the event that the government wants to encourage savings, investment or charity among other things, it is able to offer allowances and deductions to facilitate its objectives. In this sense,
the government has some say over whether or not an economy grows.
To say otherwise is to suggest that there is no need for a government; if the economy grows only when the rest of the world grows.
Income taxation is more resilient in times of recession because of its design. There is compelling evidence of this in the Central Bank of Barbados’ most recent economic reports. Furthermore, if the government has to take action to defend the balance of payments by restricting spending on imports, VAT receipts and import duties among others will contract, leading to less government revenue.
Based purely on fairness and revenue stability, no government in Barbados should even contemplate abolishing income taxation, unless the author of Kellmanomics makes it into the cabinet and gets what he really wants.
On the hand, the VAT is described as regressive because it is paid disproportionately more by the poor; its best quality is not fairness. This is why there is a reverse tax credit to help offset the impact of VAT on the lowest income workers in Barbados.
To increase the VAT rate is therefore to attribute the fiscal crisis in Barbados to the spending of the poor and working poor, when it is the spending of the government that has to be addressed.
It is impossible to close a shortfall of revenue of $500 million by raising taxation and believe that the additional revenue will mask the underlying cavity in government’s spending. Only a root canal is sufficient to restore the decay!
The small man is not only a symbol of a political party in times of election; he is the essence of a party’s public policy in times of governance. To this extent, it is impossible to separate an understanding of economic issues from the social issues in public policy.
Protect the poor and the economy!