Category: Taxation

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VAT no burden: A different perspective (Conclusion)

Introduction
Business Page of October 31 had referred to statements both by President Jagdeo and Finance Minister Dr Ashni Singh that the Value-Added Tax and the Excise Tax introduced in 2007 would have been revenue neutral. In 2007 alone, the excess of over the prior year – the basis for revenue-neutrality – was $12.6 billion, or 49%, of which VAT by itself had exceeded the taxes it was supposed to replace by a staggering 76%. Over a four year period the combined excess would therefore be approximately $50 billion. The question then is whether or not a reduction of taxes would have hurt or helped the economy and more importantly, whether the government has been honest with the VAT rate of 16%. And here a distinction needs to be made between the economy and important segments of the economy. Two women’s interests organisations, Red Thread and Grassroots Women across Race are under no illusion and from their own experiences are convinced that VAT for many, many (women) is a burden that is beyond bearing.

The government and its economists remind the country that the women miss the bigger picture of the “macro-economic fundamentals” and that the women ignore the benefits which taxation brings to the country as a whole such as the availability of accessible and free education, health care, better roads and other infrastructure. Those who make these arguments for the government often ignore the questionable quality of the public services and might never have gone to the Admissions Unit of any of our public hospitals to see the hours of waiting before receiving attention, nor are they likely to have been aware of the state of the Den Amstel or Cane Grove Primary Schools. They ignore too that however good the roads which the poor and the rich alike enjoy, the Guyana economy – whether in the hinterland or on the coastland – is a cash economy. The stallholder or the minibus conductor will only accept money and if you do not have money to pay, neither the availability of the goods nor the quality of the roads makes any difference.

The rent which the single mother is asked to pay for the most modest accommodation in the most working class of areas is often more than the gross pay of the nurse or the teacher in the public school system. Yet the more fortunate among us would carp about the nurses for their inattention to patients or the teachers for supplementing their income with “lessons.”

Jagdeo has closed the VAT rate debate
The problem in the discussion about the economy and taxation is that those two sides are speaking from very different perspectives and interests. The Minister of Finance is engaged in an abstract argument of which he may have no personal experience and speaks from the top. The Red Thread and Grassroots Women Across Race on the other hand speak of their daily experiences from the bottom. It is not hard to see the real issues from the theoretical arguments.

The problem for the poor is that the strength and logic of their argument count for nothing and since they have neither the time nor the inclination to wage a sustained and effective campaign, change in their favour is almost impossible. Jagdeo has already said that VAT is no burden which means that for all intents and purposes the matter is closed. Of course no one expects the government to admit that as an expenditure tax, VAT is borne only by consumers. Since women bear the predominant role in equipping the children for school and putting food on the table, they feel the pain of the VAT more than the menfolk.

Favouring the better off
Nor will the government wish to admit that the tax system is skewed in favour of the better off; that all tax changes since 1992 have effectively shifted the burden to the poor and in favour of the better off. Guyana has effectively abolished Estate Duty which used to capture in death the taxes which were avoided in life. A capital gains tax which already favours the shareholding class over the working class has been abolished on the gains made from trading in shares in public companies. Just ask yourselves which is the dominant shareholding class and you will see the bias in the tax system. And as the column has consistently pointed out the perquisites, expense allowances and benefits received by the managerial and entrepreneurial class including chauffeur-driven expensive vehicles, 24 hour security and meals at the most expensive restaurants are generally tax free, while the travel allowance paid to the ordinary to get to work on the minibus is taxed at the rate of 33⅓%. For the poor a meal out is a cheap Chinese while the managerial class enjoys business paid nights out at the expense of the taxpayers.

Even in tax administration, the die is loaded against the poor. They are at best employees who are sitting ducks under the PAYE system and neither need nor can afford an accountant to represent them at the GRA. Contrast that with the self-employed who decide how much tax they will pay and often pay the equally dishonest accountant to aid and abet them in manufacturing accounts to suit.

Solution
The solution in my view lies both in the income as well as the expenditure side of the accounts. In fact I think it is necessary first to decide what is the expenditure that the government needs to incur and then consider how best to finance that expenditure. Let us use as an example the Ministry of Health for which there are two ministers. With little understanding of what their roles are and not enough work for them to do, the two ministers dabble in the day-to-day affairs of the ministry and the hospitals in a manner that creates confusion rather than solutions.

In my discussion on the recent maternal and child deaths with two leading doctors I was shocked to learn that while many hospitals have modern buildings and state of the art equipment the experts and technicians to operate them are not available; that we seem to pay more attention to AIDS than to women’s health issues; that basic information on ante-natal care and nutrition is not disseminated. And pointedly, that in what appears to be a matter of policy, we underpay the caregivers.

Drugs and money for friends
This is the same ministry which along with the Georgetown Public Hospital Corporation has been paying hundreds of millions of dollars annually by way of advance payments to a friend of the government to buy generic drugs from India. These same drugs can be purchased direct or by way of tender through other suppliers at reduced cost. In 2009 the payments by the Ministry of Health and the GHPC amounted to $2.135 billion! That the government persists in this reckless arrogance suggests that instead of attempting to reduce cost, the government is more concerned about enriching its friends.

Excluding the expenditure on health by the regions, the GPHC and the Ministry of Health spent $7.3 billion in 2009 in the recurrent budget. This means that the dubious drug purchases alone accounted for 30% of the expenditure of those two agencies. If we add capital expenditure, the total expenditure in 2009 by these two agencies was approximately $10 billion. In 2010 the budgeted current expenditure of the GHPC is $3.5 billion while the expenditure for the Ministry of Health is $4.5 billion.

Reduced expenditure does not mean reduced value and it is my view is that with better policy formulation, efficient execution, reduced waste and corruption and enhanced cost management, the annual expenditure allocation on the Ministry of Health can be reduced by at least a couple of several hundred millions of dollars, if not billions.

Ministry of Local Government
Now, take the Ministry of Local Government that has overseen the destruction of democracy at the local government level. This ministry that operates like the Wild West has a Minister and two former ministers paid exorbitant salaries and benefits for doing mainly party work. If this ministry was scrapped, we could very well save much of the $250 million in the recurrent budget and $1.250 billion in capital budget.

Then we can look at the Ministry of Public Works and Communication which in 2009 had a capital budget (including supplementaries) of $10.2 billion but did not even keep a contract register to record details of financial transactions of projects undertaken by the ministry. On roads and bridges alone some $5.9 billion was spent in 2009, no doubt much of it completely wasted.

The Office of the President and NICIL which are the havens of non-accountability, non-transparency and favouritism control funds that are so secret and mismanaged they are beyond the reach of any auditor or accountant. In fact nothing less than a forensic auditor by a trained fraud investigator could unravel what has taken place around these entities.

The bigger picture
What is a safe bet is that included in the total recurrent and capital expenditure in 2009 of $128 billion, must conservatively, be at least 15% ($19.2 billion) of avoidable, unnecessary expenditure that could be cut without any loss of efficiency. If say 60% of those savings ($11.52 billion) are applied to improved salaries to government employees and payments to our senior citizens, the remaining 40% ($7.68 billion) can be applied to a reduction of the VAT which is budgeted in 2010 to bring in $25 billion. That means that instead of VAT having to bring in $25 billion in 2010 it need only to bring in $17.4 billion. The VAT rate can therefore be comfortably set at 12%, bringing a boost to the economy and relief to the poorer sections of our society.

The evidence from economic research around the world indicates that tax rates have a direct influence on saving, entrepreneurship, lower rates of economic growth, reduced rates of personal income growth, lower rates of capital formation and lower than expected aggregate labour supply. In the case of Guyana, high tax rates may also cause outward migration and the brain drain.

Just as I am sure that both the President and the Finance Minister know that 12% is what the VAT rate should have been in the first place, they also know the economic arguments for lower rates. But then from the government’s point of view that would reduce the pool of funds for whimsical spending.

Of course a more detailed examination of the current revenue and expenditure structure will necessarily reveal other possibilities. Meaningful tax reform will suggest variations of the existing tax structure, the way revenue is raised between the central and regional governments, and possibly new means of collecting taxes from those who do not currently pay. Organisational changes could see the restructuring and reduction of the number of ministries and departments, number of ministers and advisers, resulting in the reduction and re-prioritisation of expenditure.

While it would be nice for the Economic Services Committee of the National Assembly to take on such an exercise, I am not optimistic that this or the reduction of the VAT rate will happen any time soon.

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VAT no burden: A different perspective

Introduction
Last week’s column addressed President Jagdeo’s astonishing, unfounded and uninformed statement that VAT was no burden and therefore in no need of revision. For a newspaper column, it provided an exhaustive and hopefully convincing case of President Jagdeo and Dr Ashni Singh’s broken promise to make VAT revenue-neutral. And so I did not think it was necessary or useful to return to this topic this week.

Let us not be naive. The President could not possibly admit that VAT is a burden. If he did, then being the considerate leader he claims to be, he would have had to do something about easing the burden on “his people” by reducing taxes, something he has never done across the board.

He has found it easier to grant vast sums in concessions to friends, without regard for the laws of the land, than to honour a commitment to the nation. To change the law to pay emoluments to the Chancellor, the Chief Justice and the Auditor General tax free, making some more equal than others. And yes too, to increasing presidential benefits with no limits and no taxation, defying Benjamin Franklin who wrote more than 200 years ago, “In this world nothing can be said to be certain, except death and taxes.” But to the poor, the only yes is to the insensitivity of their plight.

Too poor to ‘pay’ attention
My reason for returning to the question of the VAT is because of the level of feedback on the column, including the wag who said that after paying income tax at 33⅓% and VAT at 16%, the ordinary person cannot afford even to “pay” attention to their own plight. Another asked me whether there was nothing that could be done to ease the burden of the high rate of VAT. I had to say that I could not be optimistic. Given the unlawful and increasingly outlandish things the Jagdeo administration does without any hint of embarrassment, there must be few things that it would not do. But another reason for the absence of any optimism is because others who might be expected to challenge, are themselves challenged, emasculated and supine. The consumer movement and the TUC, effectively leaderless and non-existent, have lost both their appetite and capacity to advocate, let alone to protest and defy. The first for fear of losing its government subsidy; the other having lost its credibility. The private sector has chosen the path of least resistance; the rest of society that of apathy.

And of course, everyone wants to be a president, even if they, like Jagdeo, do not know and care whether VAT at 16% on top of a very low threshold income tax rate of 33⅓% is indeed burdensome. Apparently knowledge of such mundane matters is neither an asset nor a requirement for the job of president.

The promise and the reality
In 1992 the PPP/C came to power on a promise of socialism and social justice. Then in the face of the IMF it made an about turn, adopting free market economics, the essence of capitalism. Ever since the IMF programme came to an end, the economy has had no central theme or philosophy. The President may have been educated in Russia but he seems to have an antipathy to both the word and the philosophy of socialism. Even the area in which this government has had its greatest success, housing, contrast the policy of land distribution between the poor and the powerful. Compare Pradoville 1 with Plastic City, or Eccles with Bare Root.

And consider the more blatant, in your face Pradoville 2, at Sparendaam, East Coast Demerara, where the elite are setting up one of the most exclusive communities in Guyana.

What would the Norwegians think of his much touted fear of rising sea levels submerging our coast when there is building right on the banks of the Atlantic Ocean?

The taxpayers of the country would like to know how the land was advertised, allocated and valued; who approved the community and the housing plans; who the money is being paid to; whether there are any conditions and covenants?

If our Audit Office was not so unqualified and compromised, these are the questions it would seek answers to, not whether a few hundred dollars a day spent on the residents of the Palms is value for money.

New brand of economic policy
In a country increasingly run not for a class as capitalism or socialism does, but rather for a handful of individuals, nepotism becomes too charitable a label to describe the economy’s direction. Under this new dispensation, the assets of the state are at the disposal of a few, in which no less than the President adds to the debate about evasion and avoidance, even as a covenant about the period of ownership prior to sale is dispensed with. Another word that comes to mind is oligarchy, a term that is favoured by Dr Tarron Khemraj.

If we were serious about running a national economy, our Finance Minister would not be publishing a statutorily required mid-year of so little moment and equally little practical use.

And this is not criticising simply for its own sake. Where does the Minister tell us, as he is required to do, about the impact on the country’s finances of the delay in the receipt of the Norwegian funds, or where further sums will come from to buy additional generating capacity for GPL? In 2009, GPL received more than three billion dollars from the state, Guysuco many times more, offering in return, blackouts and excuses respectively.

Instead the mid-year report was replete with national income data which could, with more authority and authenticity, have been published by the Bureau of Statistics. And in the process of that delay, the Bank of Guyana, like the Bureau of Statistics, withholds its highly useful half-year report so as not to steal someone else’s squib-like thunder. Under current economic policy and management, it is so much more necessary to satisfy the ego of one or two than the needs of the nation.

Is tax reform dead?
Now that the President has spoken on the tax system all the talk about tax reform might be considered academic and meaningless. A couple of weeks ago I declined an invitation to meet with a consultant ostensibly retained to advise on tax reform.

When the appointment of a consultant to carry out the same or a similar study came up at the level of the Private Sector Commission some time ago, the clear inference was that the appointee must be ‘anyone but Ram.’ I wish the study well even as I recognise that for eighteen years this government has promised tax reform in one breath while delivering regressivity of the tax system that causes the poor to flee into the underground economy or abroad, in another. Nothing will happen before elections 2011, since according to Jagdeo’s thinking it ‘ain’t broken,’ what is there to fix?

Perhaps the consultant can do with some numbers and statistics. Between 1992 and 2009, tax revenues have climbed from seventeen billion dollars to ninety billion dollars. The employed category has seen its contribution to those revenues increase by 860%, from $1.3 billion to $13.2 billion. For companies, their contribution to tax revenues has declined from 26% in 1992 to 20% in 2009, with most of the taxes coming from the commercial banks, GT&T and Banks DIH and DDL. The self-employed that now dominate the country’s economy contribute less than 2.5% of its tax revenues.

And in the invoice example I gave last week, some businesspersons actually benefit by stealing VAT under a system that puts the cat to mind the milk. An economy in which the illegal and criminal are major components must by definition have elements in its tax system that are also illegal and criminal.

And as we think of the tax system and its components, consider that VAT and excise taxes alone contribute more than 50% of total tax revenues.

It is trite to state that VAT and Excise Taxes are borne by consumers including the employed, retired and unemployed. While I have never subscribed to the straight maths of adding the rate of income tax (33⅓%) and VAT (16%) to arrive at the tax burden on the poor, the tax revenue data suggest that the 50% tax burden on the working and non-working poor is not too far fetched.

Reducing the personal allowance
Even before 1994 when I presented a paper Tax Reform – A Vehicle for Economic Recovery, I was convinced that our tax system badly needed reforming. Yes, we have taken some major actions such as the unification of the revenue collection agencies and sporadically have increased one element of the personal allowance.

But what we are asked to forget is that overall we have reduced the personal allowance from the high of a dollar value and one third of taxable income, which prevailed under the late Desmond Hoyte. This means that if a person’s salary was $150,000 per month, their personal allowance was $50,000. It is now only $35,000.

Conclusion
So does tax reform really mean lowering taxes? The answer is an unambiguous “not necessarily.” It is not something that can be easily dealt with in these columns, but I will try to do so. When the father of modern economics Adam Smith set out the four cardinal principles of a good tax system – equity, certainty, inconvenience and economy in collection costs, the question of big, bloated and wasteful governments was not an issue. It is very much so in the Guyana context. Of Adam Smith’s four principles, equity is the single largest question for us. But in a more practical way, it is the level of taxation that is stifling our economy, or sections of it, as some pay and others do not.

We will explore this further in the next fortnight since next week’s Business Page will take a brief look at the 2009 Auditor General’s Report that really tells us nothing that we do not already know.

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VAT no burden? What does Jagdeo know

Introduction
In his press briefing on Friday, October 22, 2010, President Jagdeo said that he does not see the Value Added Tax as a burden and therefore there is no need to revise it with a view to lowering the rate. He sought to divert calls for a reduction in the rate of VAT by spinning the consistent increases in the VAT collection as a result of widening the tax net and because of the better performance of the economy over the years. This to me demonstrates how little respect Jagdeo has for the nation and its intelligence.

At one level Jagdeo is right, that he personally does not see VAT as a burden. Indeed he would have been just as right had he said he sees no tax as a burden. And for one very simple reason. He pays no tax in Guyana. Under section 13 of the Income Tax Act, his official emoluments are exempt from income tax. And section 6 of the Property Tax specifically makes that act inapplicable to the President while section 5 of the Capital Gains Tax says that if Property Tax does not apply, then neither does Capital Gains Tax.

Presidential tax planning
Because rental income is not official emoluments it was not tax efficient for President Jagdeo to lease his Pradoville One house, since the net rental would have attracted income tax at the rate of 33⅓%. So what did the President do? Instead, he reportedly sold the property for $120M that no more than two years earlier he had valued in a division of property matter with Ms Varshnie Singh at $10 million. On that transaction alone President Jagdeo saved in Capital Gains Tax approximately $22 million! If the property had been rented over a period of time to earn the same $120 million, then assuming that the maintenance costs were borne by the tenant, he would have had to pay $40 million in taxes.

In other words, the sale by President Jagdeo of his property, the land for which he received at a subsidised value from the state, has cost the tax system between $22 million and $40 million! See why everyone wants to be a president? And on a salary of $1.5 million per month, the state forgoes income tax of close to $10M each year.

In fairness to President Jagdeo, he did not write the tax laws of which he is now the major beneficiary. That was done by Mr Forbes Burnham, whom many describe in unprintable language. Despite their socialist claims, neither of the Jagans thought of repealing this generous piece of legislation. But what Mr Jagdeo has done is made what was a temporary, ex officio benefit into a life-long benefit. Below are the benefits under the former presidents legislation he signed.

Presidential burden
For the rest of his life, President Jagdeo – and all future presidents as well – will enjoy, at the expense of the state, a free and unlimited supply of water, electricity and telephone services to his Guyana home; unspecified numbers of clerical and technical staff, gardener, maid and personal staff; fully paid medical attendance and treatment for himself and family, without limitation; full-time personal security and services of the Presidential Guard Service; unspecified number of vehicles to be provided, all expenses and costs paid by the state; two first-class return airfares provided on the same basis as that granted to serving members of the judiciary.

Most of these benefits would be considered taxable for the rest of the Guyanese. But not for the President. And if you think this is bad, consider that under this act, he will never again have to pay capital gains tax or property tax in Guyana, not ever! The one good thing is that this legislation exists in an act which any later Parliament can amend or repeal. It is worth speculating whether Mr Jagdeo could take the country to court if the Parliament were to repeal this immoral and colossally expensive act. In fact, that is itself a burden.

Clearly then the President does not have to bother personally about the impact of taxes or even VAT. While Mr Jagdeo is a consumer and would therefore suffer VAT on some purchases, unlike other ordinary Guyanese, his take-home pay and his gross pay are about the same. For the average Joe, VAT at 16% would have to be paid out of income already taxed at 33⅓%.

Selling VAT
Not being subject to the country’s wide, deep and draconian menu of taxes, the President may have honestly felt that the VAT is no burden. But let us remember that for practical purposes, he is also the country’s economist-in-chief, is a big spender and knows something about money and the nation’s finances. He played a big role in selling VAT to the nation, the architect-in-chief of a VAT system introduced under his watch four years ago. Yes, we may have adjusted and adapted to VAT and its sister, Excise Tax, but let us not forget that they only came into existence on January 1, 2007.

Having pronounced on the non-burden of VAT, the President then makes what he considers a natural progression in his line of reasoning: there is no need to revise it to lower it. But here he is being disingenuous. He and his Finance Minister have been reminded about his own sweeping, unqualified and oft-repeated commitment to VAT being “revenue-neutral.” So memory lapse is not an excuse. The nation has helped to remind him even as the people plead for relief.

But it did not need an economist to know that VAT was almost instantaneously a burden. Ram & McRae had said in its Budget Focus 2008 that “at some point the law and the tax can become excessively burdensome.” The accounting firm added that “if this point had not been reached, we certainly are very close.”

Remembering GUYEXPO
There was however no need to consider what others said or felt. Just consider what the President and his Finance Minister have said and how they have danced in delicate step on the question of VAT. The President needs no reminder of his speech at the opening of GUYEXPO 2006 during which he repeated his government’s commitment to the revenue-neutrality of VAT when he announced: “We said from the very beginning that VAT should be revenue-neutral, we are not looking to increase the collection of taxes, increase taxes or the revenue base with the introduction of this tax.”

Or that on its introduction, the government was adamant that the rate of 16% was arrived at after careful consideration and that any concession to the pleas of the trade union movement, consumer groups and civil society would undermine the Value Added Tax. Finance Minister Dr Ashni Singh insisted in his mid-year report of 2007 that the tax was revenue neutral. In fact, if we go back some months before the presentation of that report, Dr Singh, rapidly demonstrating all the schemes and skills of a politician, and disparaging the members of the opposition for suggesting that there would be a windfall, made it pellucidly clear how the government had computed “revenue neutrality.”

On page 206 of the Hansard records of the February 15, 2007 sitting of the National Assembly dealing with VAT he said, “If we turn to table VI of the Estimates, we see that the actual collections from the taxes that were abolished with the introduction of VAT, generated a total revenue of $24.3B last year, and so if the actual collections for these taxes were $24.3B for last year, and the projected collection for VAT is $24.8B, I have great difficulty in understanding where, Mde Speaker, is the windfall? These are facts of the matter.”

Well, if revenue neutrality was the goal and commitment, Jagdeo and Singh have gouged the people of this country more than fifty billion dollars.

Dancing with the facts
Dr Singh had to slither a bit when the results for full-year 2007 became public. It showed that VAT and Excise Tax had exceeded budget by $12.6 billion, or 49%. In fact for VAT alone the excess was a staggering 76% but since the two taxes were linked by the government in its revenue neutral commitment, the correct measure was the 49% excess in the combined rate.

By then of course, both the President and the Minister of Finance were aware that the rate of 16% was in fact the result of a mistake which his government had discovered very soon after VAT’s introduction. But instead of correcting the mistake, the government, under pressure to modify the rate, extended a deceptive compromise by agreeing to monitor implementation and make adjustments as necessary to bring relief.

Pity the Poor
For consumers, this was no theoretical matter. VAT is a tax on them. If the tax is not properly formulated, it is a hugely regressive system of taxation because it is imposed on expenditure. The poor do not earn enough to save; they are more affected by VAT than those who earn enough to save. Let us forget for a while that the business class has also exploited the VAT and are the biggest VAT cheats. I have in my possession a single invoice issued earlier this year by a Berbice businessman that was not only in breach of the VAT Act but cheats the revenue of close to $100,000! And that is one invoice for one businessman on one customer.

Sorry about the digression. By the time of VAT’s introduction, the government had removed the lower rate of 20% for the first band of taxable income. The wretched poor and not so poor therefore found themselves in the same tax bracket as the better off folks, paying the same rate of personal tax on income – 33⅓% – and out of the balance were then forced to pay the incorrect, immoral rate of 16% on the VAT-able items of goods and services they consume, including the meal at the corner restaurant.

With all the cheats and cheating, VAT even with poor administration is a huge tax gatherer. And the IMF and the government tried their best and placed considerable resources in ensuring that the poor did not get away. Pity that the same effort was not placed against the VAT cheats that dominate our commercial centres and rural areas. VAT has continued to be a major revenue source and even in 2010 when we expect the economy to grow by less than 3%, VAT takings over the first half of 2009 were 9%. Despite this, the Minister expects the full year increase to be only 5%!

Table: Central Government Abstract Revenue by Head
G$ Millions

Source: National Estimates and Mid-year Report 2010

Conclusion
When the first year results of VAT became known, Ram & McRae confidently and generously said in its Focus on Budget 2008 after the size of the windfall became known that “it would now be immoral for the Government to renege on its commitment to adjust the rate of the tax to make it revenue-neutral.”

Since the year of VAT’s introduction, the economy has grown by 5.4%, 3.1% and 2.3% and for this year it is projected to grow by 2.9%. Compare that with the growth of VAT collection for the same years: 47.82%, 1.06%, 20.4% and close to 6%. But if you take what he said at GUYEXPO 2006, those things had nothing to do with revenue neutrality.

Once again President Jagdeo and Dr Singh have been caught out. I am not sure they care, however, well looked after as they are and with the peoples’ taxes available to silence critics and buy support. My own view is that VAT should be made into an election issue. I am prepared to consider casting my vote for a party that commits itself to correcting the dishonesty that has characterised VAT.

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The tragedy of Godwin Maxwell

Introduction
We will soon forget the name Godwin Maxwell. But his story is most likely unique in Guyana. Mr Maxwell, a man who according to the press made a living by being a jack of all trades in the Mahaicony area, met his death in the most unusual circumstances. Having been granted bail of $30,000 he escaped from police custody and jumped into the Mahaicony River where he died by drowning. He was on a charge of tax evasion. Let us not stretch this. Neither the GRA nor the Magistrate could in any way be remotely responsible for Mr Maxwell’s unfortunate death. The GRA has a mandate to collect taxes and the Magistrate has a duty to execute the law.

Deal with tax evasion
This column has consistently called for and supported the efforts of the authorities to deal with tax evasion. My interaction and experience suggest that there are some genuine efforts to deal with it. But one has to wonder why, like in the drug trade, only the small fish ever get caught. With the politicisation of all aspects of public administration in Guyana, it would be unrealistic and naïve to believe that political influences are not brought to bear on the GRA. Indeed the story about a certain politico using his weight to get containers cleared rings with the loudness of truth.

We are told that Mr Maxwell is a promoter, even as the poor man had to depend on relatives to raise thirty thousand to post his bail. Unfortunately even a Freedom of Information Act would not allow us to know whether the country’s better-heeled promoters are pursued with the same vigour.

A country that cares about corruption would have laws that require disclosure, not to some secretive entity like the Integrity Commission, but to the public. To address corruption requires strong and independent institutions. We abhor them in Guyana. To address corruption we need honest and decent politicians. In Guyana, that would be the leading oxymoron. To address corruption we need equitable laws that are fairly applied. In Guyana, there is one law for the rich, the powerful and the connected and another for the poor, the voiceless and the helpless. The immorality of Guyana is that one set of people pays the tax while another spends it.

Tax evaders
It is often said with considerable justification that behind every fortune in the US was a robber baron, people whose wealth was acquired by the most unscrupulous methods, and often at the expense of others. The ‘honour roll’ includes names that have become famous with time – Andrew Carnegie, JP Morgan and John D Rockefeller being the most internationally recognised – and those who profited from bootlegging. That mostly nineteenth century American culture seems to be the model of economic development favoured by this government, with notable exceptions. Some of our business people actually make their money from various forms of contracts with the state and then turn around and cheat it – or rather the poor people like Maxwell – of taxes.

They ensure that their good deeds such as the pittances they periodically donate and the activities they promote are embellished in the national media while the bad is hidden in false returns to the tax authorities and secretive bank accounts abroad. The robber barons of the US on the other hand virtually created American philanthropy, using their immorally and illegally acquired wealth for the establishment of colleges, hospitals, museums, academies, schools, opera houses, public libraries, symphony orchestras, and charities. And they did not ship their money out of the country, hold two passports or live double lives.

Playing politics with taxes
The government in its cabinet outreach plays to the voters of the Amerindian community with outboard motors and motor cycles and more recently promises of laptop computers and solar power. The spending spree by Jagdeo on his outreaches represents a mockery of our campaign financing laws which President Jagdeo had promised since 2004 to address. And it is apposite to quote US president Ronald Reagan who said of the US: “We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much.” Jagdeo keeps racking up larger and larger domestic debts because he spends and spends, with no one around him to tell him that is not the way.

The dysfunction is also evident in the failure of our polity to give life and effect to Article 77A of the Guyana Constitution which requires the Parliament to enact a statute to provide for the formulation and implementation of objective criteria for the purpose of allocation of resources to, and the garnering of resources by local democratic organs. More than ten years on, and after at least two elections, this has not been done.

Kenya
Compare this government with how Kenya in its new constitution treats its indigenous communities and regions. Article 11 of the Kenya constitution on culture requires Parliament to enact legislation that ensures receipt by communities of compensation or royalties for the promotion and use of cultures and cultural heritage and recognises and protects ownership of indigenous seeds and plants, their genetic and diverse characteristics and their use by the communities of Kenya. That constitution sets a five-year time limit for parliament to get this done and gives any person the right to bring an action in the courts to enforce the provision.

The Kenya constitution is explicit on the taxes the central government can raise and provides for a range of taxes which the counties can raise. It also provides that revenue raised nationally is to be shared equitably among the national and county governments and for county governments to be given additional allocations from the national government’s share of the revenue, either conditionally or unconditionally. Criteria for equitable sharing are set out in Article 203, but the amount allocated to county governments must not be less than 15% of the national revenues of the preceding year. If political rivals whose supporters two years earlier were at each others’ throats, pun intended, could come up with such eminently sensible solutions, how else can one describe our situation but as dysfunctional?

The private sector
The dysfunction also takes place at the level of the private sector which is prepared to accept annual promises about tax reform that by now it should know are empty. The reason on the one hand is the weak leadership of the private sector which is satisfied about the number of loopholes and opportunities available in the laws and about VAT which shifts tax from the business to the consumer. And on the part of the government, VAT brings in all the revenue it can reasonably need and for reasons mentioned umpteen times in these columns, provides an annual windfall to the spendthrift government.

We know only too well how the tax system favours the haves over the have-nots and the self-employed over the salaried worker. The national estimates for 2010 show the contribution of the self-employed sector to total tax revenues to be 2.28%! That many salaried employees pay more taxes than the more successful businessman seems further evidence of a structural revenue dysfunction. The single woman gets no relief from the tax system, regardless of the number of children she has to feed and send to school. The small allowance paid to the worker to help defray travel costs is taxed but the chauffeur-driven cars for the company executives are not a taxable benefit. Plato was right: When there is an income tax, the just man will pay more and the unjust less on the same amount of income.

Sacred cows
For reasons which are not clear, the government has resisted calls for a withholding tax in the construction sector where the contractor often treats his employees as self-employed and therefore not in the social security system either. Tax reform should consider data on what they contribute to the tax revenues of various sectors of the economy and what is paid to them by way of transfers and subsidies. We need to start disaggregating the taxes paid by the self-employed and those who can afford attorneys and politician-attorneys to make representation for them at various fora. Too many parts of the system are dysfunctional.

But the greatest irony and dysfunction would be whether the lawyers who were in court that fateful morning will be declaring the fees they charge their clients.

Note: I had promised to continue looking at the mining sector this week. However, I thought I should address the dysfunctional environment which confronted Mr Maxwell.

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Threshold Country Plan/ Implementation Project was a major failure

Introduction
It was interesting to see almost the entire Cabinet turn out on February 17 at a ceremony at the Georgetown Club to mark the end of the Guyana Threshold Country Plan/ Implementation Project (GTCP/IP). The two-year project, financed by a US$6.7 million grant from the (US) Millennium Challenge Corporation (MCC), was launched on January 14, 2008, reportedly with the specific aim of supporting government’s efforts to overcome the country’s serious fiscal challenges while also streamlining the business registration process.

With the project closure coming soon after the 2010 Budget projecting a record deficit for 2010, it had to be diplomacy rather than reality for Director of Threshold Programmes, Mr Malik Chaka, to report to the assembled dignitaries on the successful implementation of the project, an assessment echoed by President Jagdeo and Dr Ashni Singh, Minister of Finance. Even if the 2010 Budget was overlooked, the assessment was not borne out by the results of other elements of the project. Indeed, the ultimate test is that Guyana did not qualify for further assistance under the programme, a sign of failure, not success.

From conception to conclusion, Guyana’s performance on the project was sub-par. Identified by the MCC on November 8, 2005 as eligible to receive Threshold Programme funding, Guyana had to secure assistance from the MCC to enable it to make its proposal. That was accepted by the MCC on June 27, 2007.

E-mail and telephone consultancy
During the course of the project, US consultants MetaMetrics Inc provided “performance-based management systems technical assistance… through email and telephone communications.” According to this firm’s website, the Government of Guyana requested the support of the MCC to provide technical, institutional and operational support in:

(i) the preparation and implementation of a value-added tax (VAT) while at the same time strengthening the institutions involved in tax administration and tax policies;

(ii) the transformation of Customs administration;

(iii) transformation of the institutions that provide fiduciary oversight on the utilization of public resources; and

(iv) completion of government procurement reforms.

According to the Final Draft Report (FDR) dated June 26, 2006, the project was a continuation of the government’s “comprehensive fiscal reforms” in the area of reducing the fiscal deficit and improving transparency, accountability and fiduciary oversight. According to the FDR, these reforms, which have received financial support from the World Bank, IMF, IDB and the CARTAC, are expected not only to alter the fundamental structure of revenues and expenditures but more importantly, to strengthen the institutions involved in tax administration and oversight, leading eventually to a progressive reduction in the fiscal deficit.

The plan
Nathan Associates Inc, another US consulting firm was appointed Implementing Partner for the project. The ‘local’ face of the project was Dr Coby Frimpong, supported by a small number of Guyanese employees. The government would, of course, be aware of how the US$6.7 million was spent, and in the spirit of transparency and accountability, should disclose how much was paid to MetaMetrics, Nathan, and Dr Frimpong who for many years was the country’s highest paid consultant, until that prize went to another foreign, non-resident consultant. It would be interesting to know too, whether the value of the grant has been incorporated in the national accounts, as required by the Fiscal Management and Accountability Act.

MetaMetrics noted that the Guyana Threshold Country Plan Implementation Project would be conducted through the following six tasks:

1) Strengthening tax administration

2) VAT implementation

3) Creating tax policy and forecasting analysis capability

4) Improving expenditure planning, management, and controls

5) Empowering and creating capacity within two principal parliamentary fiduciary oversight committees

6) Business registration and incorporation

Assessing success
It is submitted that it is against these objectives that the success – or failure – of the project should me measured. Let us look at these, though not necessarily sequentially. Item 2 of course came one year after VAT had been introduced, and it would be disingenuous for the project managers to claim any success from VAT’s implementation. Mr Chaka’s praise of the collection of “more taxes and customs revenue” was not only ill-informed but is also not the kind of comment one expects.

Did he know, for example, the government’s commitment to make VAT and excise tax revenue neutral, when in fact it turned out that collections were 48% over budget, because of an error in the rate? Had any work been done by the consultants, they would have realised that the government, even after discovering its error, never publicly admitted or corrected it, or honoured its revenue-neutral commitment.

An informed analysis of the tax collections should extend beyond crude numbers to the composition of the direct and indirect taxes garnered by the GRA. The analysis should examine the composition of the taxes collected by revenue type, sectors, regions, and classes of taxpayers. Did any of the consultants realise that using loopholes and tax shelters one major entity subject to a nominal rate of tax of 45% pays only 14% of profits in taxes? And that many others in a similar situation are not that different? Or that a person receiving a $10 million dividend from any such company pays no income tax, while an employee of the company earning $100,000 per month is required to pay income tax of $260,000 per year? Or that any pension, without limit, is tax free? Perhaps the consultants should have explained their concept of tax equity, to allow a fairer assessment of their own measure.

The missing GRA’s Annual Reports
It will take a dedicated column to examine the tax take and how the self-employed continue to evade taxes on a massive scale. The consultants should have asked the Minister of Finance why he has not brought in regulations to give teeth to the section of the Income Tax Act which empowers the Revenue to apply a presumptive method of determining the income of certain self-employed individuals. Suffice it to say that all the self-employed taxpayers of the country pay a mere 2% of the total income and corporation taxes collected by the GRA. This modest increase by this large group is partly because, as this column has consistently pointed out, a number of previously incorporated trading companies have de-registered, immediately and automatically reducing their tax rate from 45% to 33⅓% and excluding them from the minimum corporation tax of 2% of turnover. If proof be needed, the numbers show that corporation tax as a percentage of tax revenues has declined from 23% to 20% from 2006 to present. Yet, the self-employed percentage has remained fairly flat.

But tax administration would also require better governance, accountability and transparency in the Revenue Authority. I have recommended on numerous occasions that the annual report of the GRA provide useful statistical data on revenue collections to enable informed statistical analysis. Instead, in blatant violation of section 28 of the Revenue Authority Act, the Minister consistently fails to lay the annual report in the National Assembly. This is the same Minister who in his 2010 budget speech railed against persons not providing information to his Bureau of Statistics, describing non-compliance as “unacceptable and unlawful,” and threatening steps to enforce the law.

The missing tax policy
In relation to task 3 above, there has been no progress and therefore, not surprisingly, no report. The consultants were of course at a disadvantage. If the government and the Minister are not serious about tax policy, no consultants could make them become so. It takes a special government to care about tax sources or their impact.

Others care only about quantum and this government has been almost unique in that it has never been hard-pressed for revenue to finance its policies – some good and others less so. Debt-write off, on the back of poor country status, helped the government increase expenditure on the social sector, such as health and education. And just when the write-offs started to dry up, there came the annual windfall from the VAT and Excise Tax. VAT and Excise Tax in 2010 will double the collections in 2006 of the taxes they replaced, even as the economy grew by an average of 3% over the five year period.

Bureau of Statistics workshop
The consultants also probably did not notice, but according to the 2010 budget speech, the country is not nearly as poor as the government was representing it to be. With the Finance Minister now saying that the economy is actually 69% better off than would have been previously calculated, each Guyanese is now much, much better off than we had been told, if not felt. No one has bothered to say how rebasing could actually increase the value of goods and services produced in the country, but the public would no doubt be looking forward to the workshop which the Minister of Finance promised that the Bureau of Statistics would host “shortly” to provide technical details on the rebasing exercise.

Had the rebasing been done earlier, we may very well not have qualified for some of the assistance and concessions we have received from all and sundry.

But there is a more direct connection to tax revenues. The working person is paying income tax at 33⅓% taxes and VAT at an average of a minimum of 10% (to allow for zero-rating and exempt supplies), averaging about 40% and on top, another 5% to NIS which is a form of taxation. At the other extreme are companies, self-employed persons including the new army of government consultants and contract employees; those whose salaries are exempt and whose income comes from unearned income, such as dividends, interest and rents, bear considerably less than half the tax borne by the employed persons.

Since 1994, I have pointed out the inequities in our tax system. These were later identified in National Development Strategy 1 and 11. In fact this is what NDS 11 says, in part, about our tax system:

“Income taxes in Guyana appear to be inherently unfair, since persons in the informal economy, and almost the entire agricultural sector, indeed almost all in the self-employed category, do not pay them…”

If anything, despite all the studies, consultancies and promises, the situation has become worse.

To be continued