The politics and economics of tax reform
By DR CLIVE THOMAS | FEATURES, SUNDAY | SUNDAY, JANUARY 15, 2012
Source: Part I
Source: Part II
Source: Part III
Part I
Introduction
Beginning last December 4, 2011 my Sunday columns have been re-visiting the global economic and financial crisis that erupted four years ago in light of two basic considerations. First, its unexpectedly long duration and the continued absence of confident signs of recovery. And second, the emergence of both a new geographic epicentre to the crisis (the European Union, replacing the United States) and a new set of economic contradictions stalling growth (persistent joblessness, faltering private consumption and investment in rich countries, and the rise of strong political and market hostility towards continued stimulus spending). As readers know, everywhere stimulus spending had spearheaded government efforts aimed at recovery during 2008-2010.
Starting this week I shall switch focus and begin to address a number of local topics. These have become urgent because of 1) what was revealed in my coverage of the global crisis, and 2) the opportunity created by the November 28 General and Regional Elections for serious engagement of a number of intransigent problems confronting the Guyana economy. My switching topics at this point however, does not imply that the global crisis has become in any way less of an urgent issue.
Tax reform
The first local topic I shall engage is the recent PPP/C’s administration establishment of ‘another’ tax reform initiative. I say ‘another’ advisedly, as both the government and its IMF benefactors have been touting, up to very recently, that there are already serious and successful fiscal reform efforts underway! Thus the IMF in its recent (June 2011) Country Report on Guyana noted the effects of the fiscal reforms led by the Guyana Revenue Authority (GRA). It refers approvingly to specific ongoing measures, including improvements to the integrated tax information system; the operations of the tax inspectorate; the functionality of the GRA; as well as the training of tax personnel.
Meanwhile, the latest Guyana Poverty Reduction Strategy Paper (PRSP), 2011-2015, states that a Tax Reform Action Plan (TRAP) has been in place since 2003. The aims of this plan include 1) broadening the tax base; 2) reducing marginal tax rates; 3) enhancing equity and transparency; and 4) strengthening the tax administration system. Measures such as the Vat and Excise Tax legislation are part of the reforms under the TRAP, as well as the introduction of the TIN (tax identification number); organizational reform of the Guyana Revenue Authority (GRA), including IT reform; and the adoption of the total revenue integrated processing system (TRIPS).
Finally, the PRSP boasts, “the reform actions of the GRA have met with tremendous success. Tax revenues have grown by an annual average of 13 percent since 2003.”
Committee or National Commission
Despite these publicized efforts and the boast, I believe the tax system remains in dire need of deep reforms. Indeed, I shall argue that these reforms are so deep-seated as to require a far different approach for their resolution than is possible through a Tax Reform Committee made up of persons who are seen as having good working relations with the PPP/C administration over the years, no matter how skilled, proficient and experienced they are.
Today the tax system is fractured, and far too costly, burdensome and inefficient. It is dysfunctional in relation to promoting economic efficiency, growth, development and welfare, because the deep-seated problems are as much political in nature as they are technical (economic). The sure way to overcome this is through the establishment of a broad-based National Commission on Tax Reform along the lines (and for the reasons) to be outlined in this and later columns.
The premise of my proposition is that, at the core of any well-functioning tax system, is the notion of an acceptable ‘political-social contract’ between the major stakeholders. In Guyana, these stakeholders comprise, but are not limited to 1) individual taxpayers; 2) corporate taxpayers; 3) the tax administration authorities; 4) the governmental authorities (responsible for taxation laws); 5) relevant corporatist bodies like professional associations, workers and farmers organisations, consumer groups; and 6) the general public, especially the intended beneficiaries from the expenditure of tax revenues received.
Readers should note, participants in the illegal underground economy (largely fuelled by tax evasion activities), constitute a very substantial fraction of stakeholders in the tax system. However, I shall deliberately ignore them, since it is my conviction that economic activities founded on illegality cannot be an acceptable foundation for the development of any country in today’s globalized environment.
Stakeholders
I shall now turn to a brief review of the situation of some of the major stakeholders in order to highlight why a wide-ranging National Commission on Tax Reform is needed to help foster the political-social contract necessary for generating a reformed and acceptable taxation system.
Among individual taxpayers, both tax avoidance and tax evasion are practised as the flagrant norm. From reports, individual taxpayers perceive no acceptable connection between the services they receive from the governmental authorities and their payment of taxes.
Anecdotal descriptions suggest many view the payment of taxes as a ‘compunction’ and far from a ‘willing’ exchange for benefits they expect to receive. There is therefore, no notion of a binding political-social contract between taxpayer and the tax imposing authorities. In this circumstance, the state is not regarded as a moral leader, which raises the question as to why this is the case.
In large measure the behaviour of the law-making authorities is responsible. The government is seen as continually abusing the fairness of the system because the laws, regulations and policy guidelines implemented seem to favour their cronies and political constituencies and to dis-favour or punish those political constituencies not in support, and regime critics. Meanwhile, the population at large reluctantly accepts the status quo as one in which the tax system is failing to execute a political-social contract acceptable to key stakeholders. The principles of openness, transparency, fairness and justice do not stand out.
Next week I shall continue this discussion of stakeholders situations and then go on to pay some attention to the more economic features of the tax system and the primary goals of its reform.
Tax Reform 2: Blindsided by foolishness and foolhardiness
By DR CLIVE THOMAS | FEATURES, SUNDAY | SUNDAY, JANUARY 22, 2012
Share
Introduction
There is considerable irony to the fact that, as I pointed out last week, less than six months after the Poverty Reduction Strategy Paper (PRSP 2011-15) had highlighted the ongoing Tax Reform Action Plan (TRAP) in force since 2003 as a “tremendous success,” the incoming minority PPP/C administration, in one of its very first deliberate post-elections economic policy actions in December 2011, has established a Tax Reform Committee! This action puts the claim of “tremendous success” into proper perspective, and perhaps confirms the view held by most thoughtful Guyanese that today’s tax system is indeed, as I claimed last week, “in urgent need of deep-seated reforms.” This ironic situation may well be a classic example of an incoming political administration of the same political ilk as the out-going administration, being blindsided by the foolish and foolhardy actions and statements of its predecessor.
In my previous column (January 15), I had challenged the wisdom of establishing a Tax Reform Committee to pursue this objective. My main concern is that this approach frames the task of tax reform in a far too ‘technicist’ way. Experience shows that successful tax reform in circumstances like those in Guyana requires both a political and a technical (economic) approach to this task. Close study also reveals that worldwide, well-functioning tax systems are founded implicitly or explicitly on the notion of a political-social contract among key stakeholders. To achieve this in Guyana, I had respectfully recommended, as a minimum, the establishment of a National Commission on Tax Reform. This body should be empowered with all the deliberative, consultative, and legal authority normally found in such august bodies.
In support of this proposition, I started to describe last week what I believe is the mindset of the key stakeholders to Guyana’s tax system. So far I have briefly outlined the situation of three of these: individual tax payers; the law making authorities; and, the public at large. This week I shall conclude the descriptions of the remaining stakeholders.
Tax administration authorities
The tax administration authorities as a group of stakeholders also follow the basic patterns outlined last week. Tales abound about how friends, contacts, and the criminally inclined are ‘facilitated’ by the tax administration. Tellingly, perceived associates and members of the ruling political elites are also ‘facilitated’ by these authorities. While these observations by themselves would represent a system gone horribly wrong, we find that, in addition, many taxpayers look on the tax administration authorities as not only rewarding those who are politically favoured, but also using the system to punish those politically out of favour.
Regrettably, once the tax system acquires the reputation of being misused and abused for political ends, it becomes exceedingly difficult to recover the authenticity of the system. To recover authenticity requires a social and political process founded on redress and reconciliation, as the essential way towards embedding transparency, fairness, efficiency and other desired attributes into the system. Such a process underscores my call for a National Commission on Tax Reform as opposed to a Tax Reform Committee.
Business taxpayers
As a rule corporate and other business taxpayers not only support but indeed thrive on the dysfunctionalities of the tax system. Like their individual taxpaying counterparts, tax avoidance and tax evasion are flagrantly practised as the norm. This group, however, is much better equipped than individuals to pursue their illicit activities. Businesses are generally better able to employ skilled personnel to aid them in these endeavours. Financial, legal, accounting and tax advisory enterprises routinely collude with businesses to defraud the tax revenue authorities. This is so well-known by the average Guyanese that I cannot imagine the tax administration authorities are unaware of its pervasive effects on the non-payment of taxes.
In later columns I shall discuss the economic issues centering on the measurement of what economists term the tax-gap, which this generates. For now readers should be aware that in their routine activities they would have certainly come across several instances of businesses practising tax evasion. Good examples are 1) when they are given the option of paying VAT or not; 2) when they observe under-reporting by local producers of their output of goods and services; 3) when they observe the undervaluation of imports; 4) when they observe the widespread availability for sale (or public display) in business establishments of ‘smuggled’ items like cigarettes, alcohol, and beverages; 5) when they observe the falsification of labelling details on products for sale; and 6) when they encounter goods and services which are illegally obtained, being re-sold.
Added to this, powerful businesses have a reputation of bullying the tax authorities. Occasionally incidents are reported in the media, as when Stabroek News (Sep 28, 2011) reported on conflicts between a Shivraj firm and the National Insurance Scheme tax inspectorate. Perhaps local and overseas firms operating in the minerals sector (gold, diamond, manganese, copper and petroleum) have the worst reputation for tax avoidance. The desperate efforts by government to sustain the scramble for the country’s mineral resources seem to be interpreted by these businesses as a licence for non-payment of taxes. Finally, another glaring example has been recently revealed in the FBI sting operation to entrap operatives in the Guyana Gold Corporation, as revealed in the Canadian press (Vancouver Sun).
Corporatist bodies
Various corporatist bodies also constitute a key group of stakeholders in the tax system. As would be expected, these include established workers (trade unions) and farmers’ organisations, as well as consumer groups, NGOs, and professional/technical organisations. General-ly, these stakeholders have a very strong interest in the promotion of tax reform, as they are acutely aware of the deep-seated defect.
Next week I shall continue this discussion and begin by directing attention to where the taxes come from.
Tax reform 3: The taxes we pay
By DR CLIVE THOMAS | FEATURES, SUNDAY | SUNDAY, JANUARY 29, 2012
Introduction
The mindset of five major groups of stakeholders to the tax reform process (individual taxpayers; the law-making authorities; the public at large as beneficiaries of government spending; the tax administration authorities; corporate and other business taxpayers; as well as organisations like unions, farmers’ organisations, consumer groups and professional associations interested in greater transparency, fairness and efficiency in the tax system) have been briefly described in my two previous columns.
It should be further noted here that two principal considerations may have encouraged the previous government’s boast that ongoing tax reform since 2003 has been “a tremendous success.” When this claim was made the administration had highlighted 1) administrative improvements in tax collections, and 2) strong annual growth in tax revenue (in excess of 13 per cent annually since 2003).
Next week I shall consider whether these two considerations justify the pronouncement of success, as this directly relates to the question: what are the goals of tax reform? Before treating with this, readers should have some knowledge of 1) total tax revenue collected; 2) its relation to total output; 3) the contributions made by various taxes to this total; and 4) tax revenues collected in Guyana compared with other countries. I shall attempt this in today’s column.
Tax revenue by type
While the available classification of Guyana’s tax revenue by type is not ideal for economic analysis, what has been reported is adequate for our present purposes. As shown in Table 1 total tax revenue collected in 2010 was $102 billion. Unlike more developed economies, the share of taxes on goods and services of all kinds clearly predominate, as this represents over 60 per cent of the total. When these revenues are disaggregated, however, it is seen that the bulk comes from two sources: Value Added Taxes (27 per cent) and excise taxes (21 per cent) of the total.
In 2010, taxes on income constituted the second main pillar, at 39 per cent of the total. When further disaggregated the resultant shares are 21 per cent for taxes on business; 15 per cent on personal taxes; and 2 per cent came from taxes collected from the self-employed.
Based on the available classification, tax revenue from international trade and international transactions was equal to ten per cent of the total. The main sub-categories are imports at eight per cent, and travel tax ($1 billion or one per cent). If, however, Value Added Taxes on imported items, 15 per cent (as against domestic supplies at 12 per cent) are added to excise taxes on imported items, 19 per cent (as against domestic supplies at 2 per cent) we get the grand sum of 42 per cent for import-based tax revenue.
Table 1: Guyana: Distribution of Tax Revenue, 2010
Note: *figures rounded.
Source: Government of Guyana, Estimates Vol. 1, 2011.
A few observations are pertinent at this stage. First, the data in Table 1 reveal how little the self-employed contributed to tax revenue ($2 billion, out of a total of $102 billion) in 2010. Second, because total tax revenue collected is close to $100 billion, the absolute value of tax revenues raised by each type of tax approximates its percentage share of the total.
Thirdly, taxes on property (including estate duties) also contributed marginally, at 2 per cent of total tax revenue. Fourthly, total tax revenue as a ratio of rebased GDP (at current basic prices) for 2010 was equal to 26 per cent.
And, finally total tax revenue in 2010 increased by 13 per cent over 2009 ― the same as government’s average rate previously indicated for the period since 2003.
Drawing comparisons
For readers benefit, Table 2 below shows the unweighted average distribution of tax revenue by type for the 34 member states of the Organisation for Economic Cooperation and Development (OECD).
The ratio of their total tax revenue to GDP is 34 per cent, as compared to Guyana’s 26 per cent. The range, however, is quite wide, from 19 per cent (Mexico) to 46 per cent (Sweden). Seven OECD countries have a ratio of 42 per cent or over, while two have a ratio of 21 per cent or lower. Further, five OECD countries have Guyana’s ratio of 26 per cent or less.
Table 2: Distribution of Tax Revenue in OECD countries, 2009
Source: OECD Website and Eurostat (2011).
Two cautionary observations are warranted. Firstly, the difference in the total tax revenue/GDP ratio between Guyana and the OECD reflects different economic structures. Secondly, apart from structural differences contributing to the different ratios, different incremental trends in economic growth rates and tax revenue elasticity can also result in variations in the tax revenue/GDP ratios. Thus when growth rates rise faster than tax revenue yield, the ratio would fall, and vice versa. That is, if tax responsiveness is rising at a faster rate than GDP, the ratio would rise.
Next week I shall continue from this point and seek to address the question: what ought to be the primary goals of tax reform?
By DR CLIVE THOMAS | FEATURES, SUNDAY | SUNDAY, JANUARY 15, 2012
Source: Part I
Source: Part II
Source: Part III
Part I
Introduction
Beginning last December 4, 2011 my Sunday columns have been re-visiting the global economic and financial crisis that erupted four years ago in light of two basic considerations. First, its unexpectedly long duration and the continued absence of confident signs of recovery. And second, the emergence of both a new geographic epicentre to the crisis (the European Union, replacing the United States) and a new set of economic contradictions stalling growth (persistent joblessness, faltering private consumption and investment in rich countries, and the rise of strong political and market hostility towards continued stimulus spending). As readers know, everywhere stimulus spending had spearheaded government efforts aimed at recovery during 2008-2010.
Starting this week I shall switch focus and begin to address a number of local topics. These have become urgent because of 1) what was revealed in my coverage of the global crisis, and 2) the opportunity created by the November 28 General and Regional Elections for serious engagement of a number of intransigent problems confronting the Guyana economy. My switching topics at this point however, does not imply that the global crisis has become in any way less of an urgent issue.
Tax reform
The first local topic I shall engage is the recent PPP/C’s administration establishment of ‘another’ tax reform initiative. I say ‘another’ advisedly, as both the government and its IMF benefactors have been touting, up to very recently, that there are already serious and successful fiscal reform efforts underway! Thus the IMF in its recent (June 2011) Country Report on Guyana noted the effects of the fiscal reforms led by the Guyana Revenue Authority (GRA). It refers approvingly to specific ongoing measures, including improvements to the integrated tax information system; the operations of the tax inspectorate; the functionality of the GRA; as well as the training of tax personnel.
Meanwhile, the latest Guyana Poverty Reduction Strategy Paper (PRSP), 2011-2015, states that a Tax Reform Action Plan (TRAP) has been in place since 2003. The aims of this plan include 1) broadening the tax base; 2) reducing marginal tax rates; 3) enhancing equity and transparency; and 4) strengthening the tax administration system. Measures such as the Vat and Excise Tax legislation are part of the reforms under the TRAP, as well as the introduction of the TIN (tax identification number); organizational reform of the Guyana Revenue Authority (GRA), including IT reform; and the adoption of the total revenue integrated processing system (TRIPS).
Finally, the PRSP boasts, “the reform actions of the GRA have met with tremendous success. Tax revenues have grown by an annual average of 13 percent since 2003.”
Committee or National Commission
Despite these publicized efforts and the boast, I believe the tax system remains in dire need of deep reforms. Indeed, I shall argue that these reforms are so deep-seated as to require a far different approach for their resolution than is possible through a Tax Reform Committee made up of persons who are seen as having good working relations with the PPP/C administration over the years, no matter how skilled, proficient and experienced they are.
Today the tax system is fractured, and far too costly, burdensome and inefficient. It is dysfunctional in relation to promoting economic efficiency, growth, development and welfare, because the deep-seated problems are as much political in nature as they are technical (economic). The sure way to overcome this is through the establishment of a broad-based National Commission on Tax Reform along the lines (and for the reasons) to be outlined in this and later columns.
The premise of my proposition is that, at the core of any well-functioning tax system, is the notion of an acceptable ‘political-social contract’ between the major stakeholders. In Guyana, these stakeholders comprise, but are not limited to 1) individual taxpayers; 2) corporate taxpayers; 3) the tax administration authorities; 4) the governmental authorities (responsible for taxation laws); 5) relevant corporatist bodies like professional associations, workers and farmers organisations, consumer groups; and 6) the general public, especially the intended beneficiaries from the expenditure of tax revenues received.
Readers should note, participants in the illegal underground economy (largely fuelled by tax evasion activities), constitute a very substantial fraction of stakeholders in the tax system. However, I shall deliberately ignore them, since it is my conviction that economic activities founded on illegality cannot be an acceptable foundation for the development of any country in today’s globalized environment.
Stakeholders
I shall now turn to a brief review of the situation of some of the major stakeholders in order to highlight why a wide-ranging National Commission on Tax Reform is needed to help foster the political-social contract necessary for generating a reformed and acceptable taxation system.
Among individual taxpayers, both tax avoidance and tax evasion are practised as the flagrant norm. From reports, individual taxpayers perceive no acceptable connection between the services they receive from the governmental authorities and their payment of taxes.
Anecdotal descriptions suggest many view the payment of taxes as a ‘compunction’ and far from a ‘willing’ exchange for benefits they expect to receive. There is therefore, no notion of a binding political-social contract between taxpayer and the tax imposing authorities. In this circumstance, the state is not regarded as a moral leader, which raises the question as to why this is the case.
In large measure the behaviour of the law-making authorities is responsible. The government is seen as continually abusing the fairness of the system because the laws, regulations and policy guidelines implemented seem to favour their cronies and political constituencies and to dis-favour or punish those political constituencies not in support, and regime critics. Meanwhile, the population at large reluctantly accepts the status quo as one in which the tax system is failing to execute a political-social contract acceptable to key stakeholders. The principles of openness, transparency, fairness and justice do not stand out.
Next week I shall continue this discussion of stakeholders situations and then go on to pay some attention to the more economic features of the tax system and the primary goals of its reform.
Tax Reform 2: Blindsided by foolishness and foolhardiness
By DR CLIVE THOMAS | FEATURES, SUNDAY | SUNDAY, JANUARY 22, 2012
Share
Introduction
There is considerable irony to the fact that, as I pointed out last week, less than six months after the Poverty Reduction Strategy Paper (PRSP 2011-15) had highlighted the ongoing Tax Reform Action Plan (TRAP) in force since 2003 as a “tremendous success,” the incoming minority PPP/C administration, in one of its very first deliberate post-elections economic policy actions in December 2011, has established a Tax Reform Committee! This action puts the claim of “tremendous success” into proper perspective, and perhaps confirms the view held by most thoughtful Guyanese that today’s tax system is indeed, as I claimed last week, “in urgent need of deep-seated reforms.” This ironic situation may well be a classic example of an incoming political administration of the same political ilk as the out-going administration, being blindsided by the foolish and foolhardy actions and statements of its predecessor.
In my previous column (January 15), I had challenged the wisdom of establishing a Tax Reform Committee to pursue this objective. My main concern is that this approach frames the task of tax reform in a far too ‘technicist’ way. Experience shows that successful tax reform in circumstances like those in Guyana requires both a political and a technical (economic) approach to this task. Close study also reveals that worldwide, well-functioning tax systems are founded implicitly or explicitly on the notion of a political-social contract among key stakeholders. To achieve this in Guyana, I had respectfully recommended, as a minimum, the establishment of a National Commission on Tax Reform. This body should be empowered with all the deliberative, consultative, and legal authority normally found in such august bodies.
In support of this proposition, I started to describe last week what I believe is the mindset of the key stakeholders to Guyana’s tax system. So far I have briefly outlined the situation of three of these: individual tax payers; the law making authorities; and, the public at large. This week I shall conclude the descriptions of the remaining stakeholders.
Tax administration authorities
The tax administration authorities as a group of stakeholders also follow the basic patterns outlined last week. Tales abound about how friends, contacts, and the criminally inclined are ‘facilitated’ by the tax administration. Tellingly, perceived associates and members of the ruling political elites are also ‘facilitated’ by these authorities. While these observations by themselves would represent a system gone horribly wrong, we find that, in addition, many taxpayers look on the tax administration authorities as not only rewarding those who are politically favoured, but also using the system to punish those politically out of favour.
Regrettably, once the tax system acquires the reputation of being misused and abused for political ends, it becomes exceedingly difficult to recover the authenticity of the system. To recover authenticity requires a social and political process founded on redress and reconciliation, as the essential way towards embedding transparency, fairness, efficiency and other desired attributes into the system. Such a process underscores my call for a National Commission on Tax Reform as opposed to a Tax Reform Committee.
Business taxpayers
As a rule corporate and other business taxpayers not only support but indeed thrive on the dysfunctionalities of the tax system. Like their individual taxpaying counterparts, tax avoidance and tax evasion are flagrantly practised as the norm. This group, however, is much better equipped than individuals to pursue their illicit activities. Businesses are generally better able to employ skilled personnel to aid them in these endeavours. Financial, legal, accounting and tax advisory enterprises routinely collude with businesses to defraud the tax revenue authorities. This is so well-known by the average Guyanese that I cannot imagine the tax administration authorities are unaware of its pervasive effects on the non-payment of taxes.
In later columns I shall discuss the economic issues centering on the measurement of what economists term the tax-gap, which this generates. For now readers should be aware that in their routine activities they would have certainly come across several instances of businesses practising tax evasion. Good examples are 1) when they are given the option of paying VAT or not; 2) when they observe under-reporting by local producers of their output of goods and services; 3) when they observe the undervaluation of imports; 4) when they observe the widespread availability for sale (or public display) in business establishments of ‘smuggled’ items like cigarettes, alcohol, and beverages; 5) when they observe the falsification of labelling details on products for sale; and 6) when they encounter goods and services which are illegally obtained, being re-sold.
Added to this, powerful businesses have a reputation of bullying the tax authorities. Occasionally incidents are reported in the media, as when Stabroek News (Sep 28, 2011) reported on conflicts between a Shivraj firm and the National Insurance Scheme tax inspectorate. Perhaps local and overseas firms operating in the minerals sector (gold, diamond, manganese, copper and petroleum) have the worst reputation for tax avoidance. The desperate efforts by government to sustain the scramble for the country’s mineral resources seem to be interpreted by these businesses as a licence for non-payment of taxes. Finally, another glaring example has been recently revealed in the FBI sting operation to entrap operatives in the Guyana Gold Corporation, as revealed in the Canadian press (Vancouver Sun).
Corporatist bodies
Various corporatist bodies also constitute a key group of stakeholders in the tax system. As would be expected, these include established workers (trade unions) and farmers’ organisations, as well as consumer groups, NGOs, and professional/technical organisations. General-ly, these stakeholders have a very strong interest in the promotion of tax reform, as they are acutely aware of the deep-seated defect.
Next week I shall continue this discussion and begin by directing attention to where the taxes come from.
Tax reform 3: The taxes we pay
By DR CLIVE THOMAS | FEATURES, SUNDAY | SUNDAY, JANUARY 29, 2012
Introduction
The mindset of five major groups of stakeholders to the tax reform process (individual taxpayers; the law-making authorities; the public at large as beneficiaries of government spending; the tax administration authorities; corporate and other business taxpayers; as well as organisations like unions, farmers’ organisations, consumer groups and professional associations interested in greater transparency, fairness and efficiency in the tax system) have been briefly described in my two previous columns.
It should be further noted here that two principal considerations may have encouraged the previous government’s boast that ongoing tax reform since 2003 has been “a tremendous success.” When this claim was made the administration had highlighted 1) administrative improvements in tax collections, and 2) strong annual growth in tax revenue (in excess of 13 per cent annually since 2003).
Next week I shall consider whether these two considerations justify the pronouncement of success, as this directly relates to the question: what are the goals of tax reform? Before treating with this, readers should have some knowledge of 1) total tax revenue collected; 2) its relation to total output; 3) the contributions made by various taxes to this total; and 4) tax revenues collected in Guyana compared with other countries. I shall attempt this in today’s column.
Tax revenue by type
While the available classification of Guyana’s tax revenue by type is not ideal for economic analysis, what has been reported is adequate for our present purposes. As shown in Table 1 total tax revenue collected in 2010 was $102 billion. Unlike more developed economies, the share of taxes on goods and services of all kinds clearly predominate, as this represents over 60 per cent of the total. When these revenues are disaggregated, however, it is seen that the bulk comes from two sources: Value Added Taxes (27 per cent) and excise taxes (21 per cent) of the total.
In 2010, taxes on income constituted the second main pillar, at 39 per cent of the total. When further disaggregated the resultant shares are 21 per cent for taxes on business; 15 per cent on personal taxes; and 2 per cent came from taxes collected from the self-employed.
Based on the available classification, tax revenue from international trade and international transactions was equal to ten per cent of the total. The main sub-categories are imports at eight per cent, and travel tax ($1 billion or one per cent). If, however, Value Added Taxes on imported items, 15 per cent (as against domestic supplies at 12 per cent) are added to excise taxes on imported items, 19 per cent (as against domestic supplies at 2 per cent) we get the grand sum of 42 per cent for import-based tax revenue.
Table 1: Guyana: Distribution of Tax Revenue, 2010
Note: *figures rounded.
Source: Government of Guyana, Estimates Vol. 1, 2011.
A few observations are pertinent at this stage. First, the data in Table 1 reveal how little the self-employed contributed to tax revenue ($2 billion, out of a total of $102 billion) in 2010. Second, because total tax revenue collected is close to $100 billion, the absolute value of tax revenues raised by each type of tax approximates its percentage share of the total.
Thirdly, taxes on property (including estate duties) also contributed marginally, at 2 per cent of total tax revenue. Fourthly, total tax revenue as a ratio of rebased GDP (at current basic prices) for 2010 was equal to 26 per cent.
And, finally total tax revenue in 2010 increased by 13 per cent over 2009 ― the same as government’s average rate previously indicated for the period since 2003.
Drawing comparisons
For readers benefit, Table 2 below shows the unweighted average distribution of tax revenue by type for the 34 member states of the Organisation for Economic Cooperation and Development (OECD).
The ratio of their total tax revenue to GDP is 34 per cent, as compared to Guyana’s 26 per cent. The range, however, is quite wide, from 19 per cent (Mexico) to 46 per cent (Sweden). Seven OECD countries have a ratio of 42 per cent or over, while two have a ratio of 21 per cent or lower. Further, five OECD countries have Guyana’s ratio of 26 per cent or less.
Table 2: Distribution of Tax Revenue in OECD countries, 2009
Source: OECD Website and Eurostat (2011).
Two cautionary observations are warranted. Firstly, the difference in the total tax revenue/GDP ratio between Guyana and the OECD reflects different economic structures. Secondly, apart from structural differences contributing to the different ratios, different incremental trends in economic growth rates and tax revenue elasticity can also result in variations in the tax revenue/GDP ratios. Thus when growth rates rise faster than tax revenue yield, the ratio would fall, and vice versa. That is, if tax responsiveness is rising at a faster rate than GDP, the ratio would rise.
Next week I shall continue from this point and seek to address the question: what ought to be the primary goals of tax reform?