Introduction
Among other things, in the previous eight Sunday columns of this series on tax reform I have sought to establish three broad propositions. The first of these is that I readily welcome the recognition by the new Ramotar political administration that, contrary to boasts in official documents, which I have cited, Guyana’s tax regime is full of defects and therefore in dire need of reform. This is so even though, like the general public, I am not aware of the “terms of reference” of the Tax Reform Committee the President has established and when it should be reporting. Second, the evidence indicates that the existing defects in the tax system (some of which I drew attention to in previous columns) are sufficiently severe and urgent, as to require nothing less than a full-fledged stakeholder representative National Commission on Tax Reform (invested with the august powers ― legal, consultative, executive and administrative) that such bodies routinely embody, to address them.
Third, a propos of this proposal, I have presented readers with a general assessment of the key “building blocks” (nine of them) which tax analysts consider to be essential to all well-functioning tax systems. My remaining aim at this stage is to put forward my view of the desired goals for the reform of Guyana’s tax regime.
I should inform readers there are four traditional (standard) goals of taxation, on which tax analysts seem to agree. While I readily endorse these, I categorise them as non-specific goals.
That is, they are applicable to all tax systems. In this sense therefore, they are befitting of a one-size-fits-all approach to tax reform and, from my perspective, therefore, inherently limited. To these I shall add several specific or particularistic goals, based on the requirements and characteristics of Guyana’s economy and society.
To introduce these readers should recall I had concluded last Sunday’s column by drawing attention to three pertinent aspects of Guyana, which affect tax reform, namely: 1) its particular socio-economic structures and deep-seated related features (such as, political fracturing, small size, extreme openness, and the existence of a pervasive underground/parallel economy), which directly affect the functioning of the tax system; 2) the likely future evolution of Guyana’s economic structure, and in particular the potential for rapidly increasing reliance on mineral production. This is worrisome in light of empirical studies that indicate severe difficulties for revenue capture and the sustainability of revenue flows in export mineral-dependent economies; and, 3) the weaknesses of the tax reform analysis literature (some of which I have drawn readers’ attention to) is also a matter of deep concern.
One-size-fits-all goals
The four traditional (standard) tax goals found in the tax literature are: 1) revenue raising; 2) reduction in excessive income and wealth inequalities; 3) political considerations; and, 4) ability to use taxes in order to influence economic behaviour in private markets.
These one-size-fits-all goals, as I have labelled them will be addressed below. Starting next week I shall introduce further Guyana-specific goals, (which may or may not be applied elsewhere).
One is the revenue goal. To be sure, this goal does not simply require taxes designed to maximize revenue yield, rather, the intention is to raise revenue after adjusting the tax mix so as to ensure stability and sustainability of revenue flows over the short-medium-long term.
These therefore require taxes, which are sensitive to the dynamics of economic reproduction in Guyana while keeping to the forefront at all times that revenue is being raised in order to be spent.
Second, there is the redistribution goal. This goal focuses on the tax system as an instrument for remedying the systemic inequalities in the distribution of income and wealth, which private market economies reproduce, if left on their own.
I had previously observed that, worldwide, there is no strong supporting evidence that taxes can in fact significantly reduce the systemic reproduction of inequality in market-driven economies. I consequently proposed that the redistribution goal of taxation should be framed in the context of overall budgetary actions, that is, both Government’s taxing and spending tax revenue. The rationale for this is that the empirical evidence does reveal that income and wealth equality enhances the rate of economic growth, as well as the reduction in social conflict. As a consequence for me the redistribution goal, while important per se, has a broader purpose, which is the promotion of economic growth and development.
The political goal as presented in traditional/standard tax analysis is often captured in the phrase: “no taxation without representation”. Clearly it is reasonable to expect that groups and individuals would not allow the routine compulsory seizure of their income (which is what taxes do) without accepting the legitimacy of the tax authorities. This goes without saying and is therefore, fundamental to successful tax reform. The corollary of this however, is that, political stability (consensus) and political will are also key ingredients for successful tax reform. It is easier politically to “give-in” to the special interests, which benefit from the existing tax system (especially when, as in Guyana, they comprise important fractions of the ruling political elite) than to confront them with tax reform. I would therefore, place heavy emphasis on the need for political will if the goal is to avoid tinkering with the tax code and push for fundamental and comprehensive tax reform.
Finally, as I have shown repeatedly, in private market economies taxes on goods and services alter economic behaviour because they add to cost and therefore shift the relative prices of goods and services in the market place. This in turn affects their demand and supply, thereby allowing a repricing goal to emerge out of taxation. This is seen when there is deliberate tax-induced alteration of relative prices aimed at producing desired economic effects. There are numerous cases of this type of taxation, for example, 1) taxes that are directed at reducing negative environmental effects (pollution taxes); and, 2) taxes designed to encourage beneficial behaviour (tax exemption for education and medical expenses).
Next week I shall take the discussion on the goals of tax reform beyond these traditional ones.
