LET ME APOLOGISE up front to my readers for the numbers but it is the only way to present the following analysis.
The major changes to Barbados’ income tax system in the recent Budget came from a request of the minister of finance to the International Monetary Fund (IMF) to conduct a review of the domestic tax policy framework. It is clear that the major reason for the request was to make the system a “more efficient revenue raiser”.
In his attempt to grab as much revenue as he can from the public, the minister grabbed more than even the IMF intended. This is obvious from the costing of the policy to remove most of the income tax allowances and deductions and the marginal lowering of the tax rates.
According to the IMF study at page 53, the Government collected $402 million from taxable income of $1 645 million, which implied an average effective tax rate of 24 per cent in 2013.
The removal of the allowances and deductions will increase the taxable income by $187 million to $1 832 million. These figures are taken from the same page 53, as the amounts are stated for home improvements, mortgage interest, rent paid, medical examinations among other deductions.
As a result of the reduction in the following two income tax rates from 17.5 per cent to 16 per cent and 35 to 33.5 per cent, it is expected that the average effective tax rate of 24 per cent noted above would fall. It seems that the authorities used the following simple arithmetic average: ((16/17.5) + (33.5/35))/2 = 0.9357. When this figure is multiplied by 24 per cent, the result is 22.46 per cent.
This smaller effective tax rate multiplied by the bigger taxable income ($1 832 million) yields revenue of $411.4 million. This is possibly why the minister of finance concluded that the combined tax measures will net the Government an estimated $9 million in additional revenue that is $411.4 – $402 million.
The methodology used to estimate the additional revenue is flawed as it did not account for the distributional effects among the various groups of taxpayers, especially those who previously enjoyed the $187 million in allowances and deductions.
Using data from tables 15, 16 and 17 of the IMF study, the following breakdown of taxable income was estimated as seen in Table 1 below – add $25 000 to the average taxable income to get the average assessable income in the respective income groups.
Table 1 shows the distribution of taxpayers by assessable income groups with the average taxable income in each group. There is also the average taxes paid per group. The average effective tax rate is average taxes paid divided by average taxable income.
The critical number in Table 1 is the overall average effective tax rate of 24.2 per cent which is consistent with the IMF’s number of 24 per cent in the study. This number gives reliability to the numbers in Table 1.
The removal of the $187 million in allowances and deductions increases the taxable income of the respective income groups and therefore increases the average taxes paid. Table 2 shows the comparison between the average taxes paid by the different income groups in 2014 and in 2015 after the tax measures mentioned above take effect.
Table 2 shows an estimated increase of $34.3 million in Government revenue. The marginal decline in the average effective tax rates across the various income groups is offset by the increase in taxable incomes. As expected, the average taxes paid rises as income increases.
It is unfortunate that a revenue-grabbing Government did not take the time to better analyse the impact of its tax measures on an already overburdened tax paying public.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email [email protected].
