Introduction
Last week I started a discussion on the notion of tax fairness and equity, which I indicated is an essential feature for all well-functioning tax systems and thus tax reform in Guyana. More specifically, I argued that, in regard to tax regimes, fairness and equity simultaneously embody notions of sameness (or pre-tax equalities) and difference (or pre-tax inequalities). Sameness requires that taxpayers in similar economic circumstances (that is, having the same taxable income and wealth) should pay the same amount of taxes, as they are presumed to have similar capacities or abilities to do so. Difference requires that taxpayers with unequal economic circumstances (that is, different taxable income and wealth) should pay appropriately differentiated taxes. The above conditions hold if, and only if, we assume: 1) taxpayers’sources of income and wealth are all equally capable of being caught in the tax net; 2) no differences in the benefits from government spending received by taxpayers in similar circumstances; and 3) no differences in taxpayers tastes. It is only under these assumptions that pre-tax income and wealth would equal taxpayers’welfare.
Implicit in this logic is that there is, and can be, no objective standard of what constitutes tax fairness and equity. A social view of the fairness is therefore required. And, for Guyana’s tax system this can only be arrived at through national dialogue, led by a stakeholder representative National Commission on Tax Reform. In my view, this is the only workable modality for arriving at an ethical framework (or a social preference function as tax analysts term it) for addressing tax reform and fairness in Guyana. Furthermore, the brief comments that I offered last week on horizontal and vertical equity, and progressivity, proportionality and regressivity of taxes, reinforce how theoretically suspect are contemporary neo-liberal approaches to tax reform. Hopefully, this approach will not be applied to Guyana.
This week I shall wrap up the discussion on tax fairness and equity. Thereafter, beginning next week, I shall introduce my considered recommendations as regards the desired goals of tax reform in Guyana.
The preferred tax-base
Neo-classical tax analysts often raise the issue of the relative fairness of consumption-based as against income-based taxes. Their argument describes taxpayers’ income (output) as what they in effect contribute to the size of the national cake (GDP) and consumption as what they withdraw from it. In light of this consideration, they purport that consumption-based taxes are more pro-growth (that is, fostering increases in society’s well-being) than income-based taxes. Moreover, they argue, over the long-run (lifetime!), consumption expenditure of households is far more stable and therefore a better indicator of sustained ability to pay taxes than income received, as the latter suffers from greater long and short-term variations.
The flaw in this proposition is readily revealed. Readers have only to ask themselves the question: is it fair to say consumption is a better measure of ability to pay? Consider a situation where one taxpayer consumes all his/her monthly income ($50,000) while another consumes the same amount ($50,000) but this represents only half of his/her income ($100,000). The neo-liberal solution to this obvious weakness is to propose taxing savings as well (that is the difference between consumption expenditure and income). However, from every standpoint this objective would be more easily achieved through directly taxing income. There is no presumptive superiority of consumption-based over income-based taxation.
Overall impact
The above conclusion also supports the observation made last week that, the overall distribution impacts of both taxing and government spending have to be evaluated before the determination of fairness can be arrived at. A taxpayer who benefits from tax giveaways is not in similar economic circumstances as one who has the same taxable income and wealth without the benefit of tax giveaways. Their welfare positions clearly differ by the value of tax giveaways. It can be said therefore that a broader political economy of tax fairness or equity is not captured in the current theory and/or practice of tax reform. Unacceptable levels of neo-liberal orthodoxy have penetrated tax analysis.
Taxation and income distribution
Further, most readers are well aware that taxes maybe geared to wider non-economic objectives. Consider as examples 1) taxes which aim to promote hinterland development over coastal development; 2) taxes which promote rural areas over towns; and 3) taxes that support savers over spenders. There are also taxes (like our Value Added Tax) VAT, which are expected to capture income earned in the underground economy when it is spent in the official economy on consuming goods and services. Finally, readers should also note that empirical studies do not provide supporting evidence for income and wealth taxation effectively reducing income and wealth inequalities, which are routinely generated in private market-based economies. This is true for both developed and developing market economies.
As I indicated in earlier columns of this series, in 2010 about two-thirds of tax revenue was generated by taxes levied on the consumption of goods and services (VAT, excise taxes, trade and ‘other‘ taxes). Compared to developed economies, taxes levied in Guyana, on personal income and business income only yielded 15 per cent and 21 per cent respectively. Of note also, taxes on wealth (property taxes) contributed marginally (two per cent) to total revenue in 2010.
I am confident that, in the long run, government targeted spending on the poor in Guyana (pensions, health, social security, and other targeted benefits), offer the greatest scope for supporting budgetary fairness in Guyana.
Conclusion
Next week I shall begin my discussion on the goals of tax reform in Guyana. A driving conclusion of the analysis thus far is that designing tax reform requires a deep appreciation of 1) the socio-economic structure in Guyana (including political fractures, the pervasive influence of the underground economy, and its openness); 2) the limitations of much of the received tax analysis literature (briefly reviewed in this and earlier columns) ; and 3) the likely future evolution of the economic structure and therefore sources of tax revenue (including the potential for rapidly increasing reliance on mineral production ― oil, manganese, gold, diamonds, etc).
Globally, the latter has uniformly created highly complex problems of tax capture and sustainability.
