OPINION - GEORGE M. MANGION| Wednesday, 21 November 2007

Taxing consumption not work

You will be forgiven if you think that after the announcement of the 2008 budget both political parties are being accused of promising too much. The Opposition is keen to launch its own promises based on four additional proposals whose true financial cost has been put in doubt.
These included a halving of the surcharge, abolishing tax on overtime work, giving back holidays that fall on weekends and reaching a higher GDP growth of 4 to 6 percent. Surely the most contentious one being the abolishing of tax on overtime. Curiously this was also a key economic reform introduced by President Nicolas Sarkozy in October this year. In his opinion this measure could stimulate growth as rules came into force removing tax and social charges from overtime hours. As can be expected the French reform is intended to encourage workers to work longer hours, and companies to make more work available.
Last month, Sarkozy, a high-speed mover in the French presidency has decreed that all hours worked beyond the statutory 35 hours in the week will be free of charges for both employer and employee. It goes without saying that this measure on its own and without the necessary safeguards will open the floodgates for abuse. On the otherhand in France as in Malta the economy is based on SMEs employing few workers. In this category once the tax exemption is in place the take home pay will be augmented and thus open the scope for better productivity.
Back to Malta the proposal by the opposition to cut tax on overtime if elected next year has been inundated with criticism from leading economists, even those of left wing tendencies. The proposal has been evaluated by the opposition to reduce Government revenue by Lm2 million annually. This is based on what the Prime Minister said in the Budget speech that declared earnings from overtime stood at Lm12 million. Unsurprisingly the opposition motto is to tax consumption rather than work. Ironically this fits in squarely with removal of tax on overtime.
Surveys also show that overtime was done mostly by lower earners and while abuse could be anywhere, yet in economic terms it would turn the wheel better as has been the guiding principle in the French Republic.
To be fair, once the measure is introduced then we also have to compensate the high earners who habitually are not entitled to overtime. Therefore the measure needs fuller consultation with the constituted bodies in order not to play havoc on industrial relations and existing collective agreements. Yet it may be worth a try. It is not perfect and being a radical move more needs to be put into the equation presumably compensating part-timers who are currently charged 15% tax on earnings up to Lm3,000 annually.
Again the idea of lowering tax on production has also been clearly manifested in the budget typically reducing income tax for the second consecutive year. It is here that the plot thickens. In retrospect the Prime Minister gave a different interpretation when quizzed about the cost of implementing this measure. He had calculated that the cost of Labour’s proposal in foregone tax would be Lm12 million roughly working out as 15% on a total earnings of Lm80 million. There seems to be a massive dichotomy here. Ideally, we can be given an official estimate by the National Statistics Office. Based on an official declaration one can better evaluate the loss of tax for the Exchequer. Yet one cannot completely underrate the efficacy of such a tool to boost our level of competitiveness. This year has seen strong product demand with many companies in the export arena paying record amounts of overtime. For production workers, that usually means time and a half or, in some cases, double pay.

You will be forgiven if you think that after the announcement of the 2008 budget both political parties are being accused of promising too much. The Opposition is keen to launch its own promises based on four additional proposals whose true financial cost has been put in doubt.
These included a halving of the surcharge, abolishing tax on overtime work, giving back holidays that fall on weekends and reaching a higher GDP growth of 4 to 6 percent. Surely the most contentious one being the abolishing of tax on overtime. Curiously this was also a key economic reform introduced by President Nicolas Sarkozy in October this year. In his opinion this measure could stimulate growth as rules came into force removing tax and social charges from overtime hours. As can be expected the French reform is intended to encourage workers to work longer hours, and companies to make more work available.
Last month, Sarkozy, a high-speed mover in the French presidency has decreed that all hours worked beyond the statutory 35 hours in the week will be free of charges for both employer and employee. It goes without saying that this measure on its own and without the necessary safeguards will open the floodgates for abuse. On the otherhand in France as in Malta the economy is based on SMEs employing few workers. In this category once the tax exemption is in place the take home pay will be augmented and thus open the scope for better productivity.
Back to Malta the proposal by the opposition to cut tax on overtime if elected next year has been inundated with criticism from leading economists, even those of left wing tendencies. The proposal has been evaluated by the opposition to reduce Government revenue by Lm2 million annually. This is based on what the Prime Minister said in the Budget speech that declared earnings from overtime stood at Lm12 million. Unsurprisingly the opposition motto is to tax consumption rather than work. Ironically this fits in squarely with removal of tax on overtime.
Surveys also show that overtime was done mostly by lower earners and while abuse could be anywhere, yet in economic terms it would turn the wheel better as has been the guiding principle in the French Republic.
To be fair, once the measure is introduced then we also have to compensate the high earners who habitually are not entitled to overtime. Therefore the measure needs fuller consultation with the constituted bodies in order not to play havoc on industrial relations and existing collective agreements. Yet it may be worth a try. It is not perfect and being a radical move more needs to be put into the equation presumably compensating part-timers who are currently charged 15% tax on earnings up to Lm3,000 annually.
Again the idea of lowering tax on production has also been clearly manifested in the budget typically reducing income tax for the second consecutive year. It is here that the plot thickens. In retrospect the Prime Minister gave a different interpretation when quizzed about the cost of implementing this measure. He had calculated that the cost of Labour’s proposal in foregone tax would be Lm12 million roughly working out as 15% on a total earnings of Lm80 million. There seems to be a massive dichotomy here. Ideally, we can be given an official estimate by the National Statistics Office. Based on an official declaration one can better evaluate the loss of tax for the Exchequer. Yet one cannot completely underrate the efficacy of such a tool to boost our level of competitiveness. This year has seen strong product demand with many companies in the export arena paying record amounts of overtime. For production workers, that usually means time and a half or, in some cases, double pay.