Introduction
I trust that there is no ambiguity whatsoever in the minds of readers as regards my opinion of the four traditional or standard goals of taxation, which I introduced in last week’s column (raising revenue; reducing income and wealth inequalities; politically facilitating stakeholder representation in the tax regime; and altering relative prices of goods and services in order to reward-punish economic choices). Putting it as clearly as I can, in my view the traditional goals play obvious and important direct roles in all tax systems, Guyana included. My description of them as one-size-fits-all goals is not intended to be dismissive but only to emphasize that there are other, Guyana-specific goals that have to be considered if tax reform is to be fundamental and comprehensive in its scope. The corollary of this observation therefore, is that, the traditional goals, whilst remaining essential, are inherently limited in their ability to fully address tax reform in Guyana.
Economic Efficiency
The first additional specific goal, which I introduce, is the requirement that, in the context of Guyana’s circumstances, the tax system is made as efficient as possible from an economic standpoint. In economic terms this requires at least the following three conditions: 1) ensuring resources dedicated to tax collection are utilized at their most effective level 2) minimizing resources dedicated to tax avoidance and evasion, as from an economic standpoint such resources are as real as those dedicated to tax collection, and 3) the resources indicated at 1 and 2 are those utilized by the tax authorities; tax payers themselves; and those third parties that are always involved in tax collection (for example, banks; businesses administering PAYE; social security agencies; VAT and excise tax collectors; legal and enforcement agencies; and so on).
Some tax analysts argue that this goal should be routinely added to the four traditional goals that I have already cited. They classify it as one element of a necessary managerial triad to accompany all tax reform namely: political will; administrability; and, sound implementation. The maxim they put forward is: “a tax system is only as good as it is administered!” I believe most Guyanese would accept this since our tax regime is seen as: capricious, discriminatory, politically biased, cumbersome and non-transparent. Consequently the management goals of reform are transparency, credibility, practicability, fairness, and, political neutrality. To my mind all this adds up to achieving economic efficiency, given the goals of tax reform.
To summarize therefore, a necessary complement of the traditional goals of tax reform is managerial and administrative reform of the agencies of taxation. This cannot be achieved without 1) high level (quality) skilled and professional staffing; 2) the requisite staff training being put in place; 3) pay and remuneration at levels required to fairly reward and motivate staff; and, 4) oversight/monitoring/verification (OMV) arrangements so as to eliminate corrupt practices and encourage the judicious execution of duties.
Taxpayers ― Thieves or Clients
It may consequently be argued that, in order to transition the existing tax regime in Guyana from what it is, to a reformed system of tax governance, taxpayers have to be treated as clients of the tax authorities and not as potential thieves, tax evaders, or source of bribes. The enormity of this endeavour reinforces my judgement that tax reform in Guyana is not the task of a Tax Reform Committee (no matter how technically proficient) but a broad-based stakeholder-driven consultative National Commission.
Macroeconomic Goal
The tax system is important both to the promotion of long-term economic growth and development in Guyana, as well as to the promotion of short-run or near-term macroeconomic stability. The latter, means modulation of short-run variations in prices, income, output and employment. In this regard, the Government of Guyana presently relies heavily on both monetary regulation and fiscal policy (taxation and spending). However, worldwide it has come to be realized that the former (monetary policy) is far more flexible and adaptive than fiscal policy in the short-run.
Officially, the Government of Guyana has described its macroeconomic policy goal over the decades as “centered on fiscal discipline, price and exchange rate stability”. Based on this, its fiscal policy has been directed at reducing the government deficit to a sustainable level and in support of price and exchange rate stability. Exchange rate variation is considered as the principal source of price instability and inflationary pressures.
This official posture is to my mind quite reasonable. However, of recent note there have been pressures on the government deficit (public debt), exchange rate and price level. Clearly tax reform will have to address these issues in its recommendations.
Above all, the most difficult consideration is that, in open economies like Guyana, variations in tax revenues tend to be pro-cyclical, rather than the more desired anti-cyclical (which supports government spending in time of need). Thus when export revenues fall in Guyana, output falls and so do tax revenues. But at this time counter cyclical policy (government stimulus spending) is needed to sustain employment and incomes. This problem will become increasingly exaggerated as Guyana’s reliance on mineral exports intensifies in the future. This dilemma calls for innovative taxation, finance, and savings arrangements, as the worldwide experiences of other highly mineral dependent exporting economies reveal.
Initial Conditions Matter
In conclusion, consideration of these issues clearly highlight that, while tax reform has to pay close attention to initial conditions, Guyana finds itself at a crossroads as it has to also deal with (anticipate) the future dynamics of growth and development. By definition therefore, tax reform cannot be based on the static considerations of initial conditions in Guyana.
Next week I shall wrap us this series of articles on tax reform. After the Tax Reform Committee reports, I shall assess their analysis and recommendations in future columns. However, if the 2012 Budget is presented before that, I shall assess that first, in a manner designed to accompany my previous assessment of the National Budget for 2011 (published in Stabroek News columns (February 6 – May 22, 2011)).
