I have tried to make it clear that my treating with tax reform in my current columns has been deliberate. It is entirely based on the establishment last December, 2011 of a Tax Reform Committee by the incoming Ramotar administration. I share the view that the tax system is in dire need of reform, but I hold firmly to the position this is best accomplished through a National Commission on Tax Reform, in which key stakeholders are represented. Only such an august and representative body could command the legal, administrative, consultative, and institutional gravitas required for full public participation in this endeavour. Already there are complaints that the public has little or no idea of what the Tax Reform Committee is doing, when it is expected to complete its task, or even if public involvement is encouraged.
Readers should recall that, less than six months ago, the outgoing Jagdeo administration had laid in the National Assembly its cornerstone economic strategy document, which boasted its ongoing Tax Reform Action Plan (in force since 2003) was a “tremendous success.” Support for this assertion was illustrated in the claim that tax revenue had been growing at an average annual rate of 13 per cent since then.
It should not escape alert readers this rate of growth is about five-to-six times faster than the real growth of Guyana’s GDP since 2003! I presented data in last Sunday’s column confirming an annual rate of growth of 13 per cent for 2010, and further indicated the ratio of tax revenue-to-GDP in Guyana was 26 per cent for the same year ― with most of the revenue being derived from taxes on goods and services.
This week I shall address some important related features of this tax revenue ― GDP ratio.
The tax-gap
No doubt most readers would consider Guyana’s tax revenue-to-GDP ratio of 26 per cent to be undesirably high in the sense that 1) there is too much taxation and 2) the value received from its related government expenditure does not justify this. However, perhaps the sadder truth is that total tax revenue collected in 2010 ($102 billion) is a substantial underestimate of the taxes which ought to have been paid and collected given the tax measures currently in force!
The tax-gap in Guyana
To comprehend why this may be the case, one has to understand the concept of the tax-gap, developed by economists and occasionally estimated in other tax jurisdictions. Simply put, the tax-gap in Guyana may be defined as the difference between 1) the value of the theoretical liability of Guyanese tax payers (based on the existing tax code) and 2) what they actually pay. In practical terms this difference is made up of 1) illegal tax evasion in the regular/official economy (that is, underreporting, not filing at all, or deliberate under-payment of taxes due on legal income earned in a particular fiscal year) and 2) illegal tax evasion of income earned in the underground economy. Based on my informal estimation, this difference could well be as large as the total value of taxes actually collected. This is indeed remarkable.
My estimate is based on several considerations; including 1) my own separate estimates of the size of the underground economy, which has been carried in several previous SN columns. (This could plausibly be as high as 50 per cent of the officially recorded GDP); and 2) the systematic underpayment of taxes in significant sectors of the Guyanese economy.
One of these sectors has been recently highlighted by the Minister in the newly created Ministry of Natural Resources and the Environment. Echoing earlier estimates carried in a number of reports and research papers dealing with the small-scale mining sector, the Minister referred to declared gold output in 2010 (363,000 ounces) as being only about two-thirds of actual production in that year (600,000 ounces). This difference translates into lost tax payments on about $80 billion of gold production for 2010.
Other sectors, which are equally notorious are: 1) those profitable independent farmers who for years have paid negligible income/property taxes; 2) self-employed professionals who routinely evade paying taxes due on their incomes; 3) skilled artisans in similar positions; 4) retail outlets of all types that evade VAT and excise taxes; 5) foreign companies (particularly those engaged in the scramble for minerals) that inflate expenses and under-declare income.
Tax-gap: other jurisdictions
As an individual researcher, I do not have access to tax returns for Guyana. I cannot therefore draw samples from these in order to estimate more accurately the size of the tax-gap. However, in other jurisdictions this has been done by the authorities. Thus, the Internal Revenue Service Office and the Congressional Budget Office in the USA, as well as the Public Accounts Committee of the UK Parliament and Her Majesty’s Revenue and Customs have reported on their estimates of the tax-gap for their respective countries.
What do these other estimates show?
The US authorities measure only three components of the tax-gap, namely, non-filing; underpayment; and, non-payment. The last item accounts for 80 per cent of their estimated tax-gap. The authorities declare they make no effort to estimate taxes lost through the operations of the underground economy. However, I have included these in my discussion of the tax-gap in Guyana. For recent years various estimates of the US tax-gap converge around US$300-500 billion, or about one-sixth to one-fifth of total tax revenue.
Meanwhile in Britain emphasis is placed on taxes lost through the illegal manipulation of the tax code by corporations and wealthy individuals. Indeed, the authorities express deep concern about the army of accountants, lawyers and financial analysts who seem to dedicate their skills towards evading tax obligations. They claim technical expertise is used to support tax evasion as a priority over professional regard to personal and business social responsibility. Estimates of the tax-gap in Britain range between 10 per cent and 35 per cent.
Next week I shall wrap up this discussion of the tax-gap.
