Let me state categorically, that the ABLP will eliminate personal income tax in its entirety.
Our position on PIT is not a political ploy, it is an economic philosophical position.
The ABLP is philosophically opposed to taxes on personal income. PIT has negatively impacted the lives and living standards of many middle class families and undermined business starts and business sales. We believe that personal income tax is economically destructive, because it taxes directly the reward for work, it taxes savings, it taxes investments and it taxes entrepreneurship. In essence it reduces the personal wealth of tax payers.
The ABLP will reward and incentivised the reward for work by eliminating PIT and putting back in excess of 40 million dollars back into the pockets of tax payers.
The result of our tax policy will be more savings, more investments, more business starts, more business sales, more job creation, higher disposable wages and income and higher overall economic growth. This will increase aggregate demand, build confidence in the Economy and ultimately increase the velocity of circulation of money in the economy which will be taxed by the indirect taxes every time the money turns.
The assumption that there will be no income recovery from the elimination of PIT through indirect taxation is fundamentally flawed. What we are proposing is a switch from taxing personal income to taxing consumption. So the economic activity will still be taxed but it will be taxed at the consumption end and not directly on income for the reasons stated before. The elimination of PIT is not difficult to achieve because our tax base is not payroll tax intensive. PIT only constitutes about 7 percent of total revenue, so the switch to indirect taxation could be made without any serious dislocation.
It is important for our listeners to know that a consumption tax is more favourable to savings than an income tax. The propensity to save increases with income but is ultimately reduced by income tax. The larger the savings and investment, the higher the future level of income. Savings increase the capital formation for investments and or consumption. This is the fundamental reason why we will tax consumption and not income in order to achieve robust economic growth and development.
At the end of the day, we will be responsible and would make sure that the switch is at a minimum, revenue neutral, that is, no net loss in revenues. This would be achieved through a combination of organic revenue growth and best value for money expenditure management, which will eliminate 10’s of millions of dollars in wasteful, non-value added, pork barrel expenditure.
The notion that the elimination of PIT will reduce corporate income tax significantly is also flawed because the allowances for salaries and wages could be capped by the Inland Revenue Department in assessing corporate liability for closely held firms in which the owners are likely to convert corporate income into personal income as a tax shield.
In response to the other speculative political rhetoric, there is no empirical evidence to support that the previous ALP Government arrears on debt was a function of the elimination of personal income tax. To the contrary, there is evidence to support that the economy grew exponentially after the elimination of personal income tax in 1976. Past arrears were due primarily to large borrowings incurred mainly for crucial socio-economic infrastructural development, and the cash flows from these projects were inadequate to service the debts. It is important to note that this is common to most developing countries in which decisions have to be taken to incur debts to build the socio-economic infrastructure to fuel economic growth and development, even at the risk of building up arrears. A case in point is when a highly leveraged ALP Government borrowed EC$67M to build a second cruise pier at Nevis Street. Even though the Government is struggling to pay this loan, it resulted in the doubling of cruise tourist arrivals which is now in excess of 600K annually.
Between 2009 and 2011, the economy contracted by 25 percent, this contraction was due primarily by declines in wholesale/retail trade and construction. This was also exacerbated by a contraction in public investment as a result of the lack of fiscal space which forced a program of fiscal consolidation.
The fiscal policy options to stablise the economy are: to increase Government spending which is not an option because the Government does not have the fiscal space to spend more.
The second fiscal option is reducing taxation which is expansionary in which tax payers will have higher disposable income and would be expected to spend more. So when we re-assume the governance of our country in 2014, the elimination of PIT will be utilised as a fiscal policy instrument to increase disposable incomes, savings, investments, confidence and ultimately more robust GDP growth.
Let me give you an example how the new tax policy will be people empowering. Individuals who are presently paying personal income tax monthly will be incentivised to invest in various projects to include investment properties. For example, a person could assign his or her monthly savings from the elimination of PIT to borrow to construct an investment property for rent as part of his or her retirement planning. By so doing, the tax payer could turn at least a 10 percent return on his investment which would contribute to an increase in his or her disposable income. The rental income could then be utilised for further investments or even consumption. The economic activities generated from such an investment and even the rental income, when spent, will be captured by indirect taxes including the 15 percent ABST. Other taxes will also apply to include land and building taxes. The monies invested in the property would create several construction jobs, support retail sales for hardware stores and suppliers of building aggregates. These purchases will also carry a 15 Percent ABST thereby providing compensatory revenue for the loss in personal income tax. Any profits generated by these businesses will also be taxed at a 35 percent rate of corporation tax or 25 percent business tax.
In fact, this position even negates the UPP Government’s strategy last December, in which they lowered the rate of tax in order to stimulate consumption demand. In essence the monies will be taxed every time it is spent utilizing the indirect tax regime to include the ABST, property taxes etc. It is an economic philosophical position that the country is better off taxing consumption instead of taxing incomes.
What is also instructive from the analysis, is that their plan to further burden the middle class with an increase in PIT from 42 to 59 Million in 2013 , an increase of 40 percent.
It also very instructive, that with all of the new tax measures that have been made for the past eight years, the claim is made that taxes collected is less than 20 percent of GDP. The PIT was introduced to increase the tax yield and that clearly has not worked because they have taxed out the middle class and moreover, have reduced disposable incomes and damaged confidence and the economic equillibirum.
Fiscal policy has a direct bearing on the level of demand. Consumption is a function of disposable income. Since 2009, Finance Minister, Harold Lovel has introduced several new revenue measures which have all impacted on disposable incomes and aggregate demand and instead of realizing their projected increase in tax to GDP, we have actually seen an inefficient tax system with a reduction in yield which they claim is now at 19 percent of GDP.
THE ABLP is pro (in favour of) growth and there is conclusive evidence to show that Antigua & Barbuda’s economy outperformed all of its regional neighbours in GDP growth without personal income tax. As a result, we enjoyed full employment and the lowest level of poverty in the English speaking Caribbean. There is also evidence in the United States to prove that all states without taxes on income invariably outperform those with taxes on incomes to include higher GDP growths, lower unemployment etc. There can be no economic or fiscal sustainability without growth. Growth will be the fulcrum of our economic plan unlike the conservative growth restrictive, backward looking, “book keeping” NEST plan that has not worked and will never work. The success of the nest plan and its reliance on PIT has produced a net reduction in economic growth of 23.5 percent during the last four years, many business failures and the highest rates of poverty and unemployment in our modern history.