Sociologist, activist, local councillor, drummer from Malta

Friday, July 23, 2010

Fiscal crisis and tax populism

Michael Briguglio

The Times, Friday, 23rd July 2010

A recent article of distinguished American social scientist Immanuel Wallerstein serves as an eye-opener to the perils of populist rhetoric for the so-called "lowering" of taxes.

Prof. Wallerstein explains how practically all governments around the world are having problems to balance their budgets and inevitably borrow money or reduce costs, which, at the end of the day, do not seem to be enough. Hence the need to raise taxes, which can be done in various ways, both directly (such as an increase in income tax or VAT) or indirectly (such as increasing the costs of government services).

He says that, ultimately, governments have to make choices as to which groups are going to be affected by fiscal policy. Hence, while some countries (such as those in Scandinavia) have progressive income tax systems, where the wealthy pay more than the less wealthy, others (such as Baltic states) are characterised by flat-rate systems where everyone pays the same percentage.

Prof. Wallerstein could not have put it better when he says that "The only slogan to which no one should give credence is the slogan, 'lower taxes'. There is no way whatsoever to do this. There are however fairer and less fair forms of taxation. The question we all face is whose taxes will be raised and via which channel. This is one of the key political battles of our time".

Apply this to Malta and one can draw some quite interesting conclusions.

The Nationalist government is increasingly shifting costs and burdens in a flat-rate manner where, save for income tax, all citizens are equally footing the bill irrespective of their income or sustainability of practices. Malta's eco tax system is a case in point, where no distinction is made on different types of products - hence the "ecological" aspect of the tax is basically absent.

The inefficiency of the Nationalist government is resulting in a hefty tax burden especially for low- and middle income earners, who are facing more costs and who, at the end of the day, have to face realities such as never-ending hospital queues, Third World roads and a high cost of living with very little government regulation.

Unfortunately, the Opposition is not proposing much improvement other than a fiscal policy of the "Father Christmas" type. Judging by its statements and its media apparatus, Labour cries foul on every form of tax and promises to reduce the so-called tax burden. At the same time, it promises to improve public services. This is yet another contradiction-in-terms of the "progressive-and-moderate" type. How can public services improve if government revenue decreases?

Hence, Labour is either attempting to take everyone for a ride with its "no adversaries" populist rhetoric or is ignorant of the fact that it is difficult to reconcile social justice with neo-liberal economics. Labour should make up its mind: either being for more economic freedom yet inferior public services or being for higher taxes and better public services. As a Green, I am for the latter.

Alternattiva Demokratika - the Green party has a clear stand on fiscal policy in line with the vision of the Green New Deal, which aims to generate green jobs in areas such as education, IT, transport, tourism, waste management, agriculture and so forth.

As a party which prioritises sustainable development, we aim for a responsible synthesis of social, environmental and economic factors. Hence, AD does not resort to cheap promises that are ultimately costly in terms of social justice and fiscal responsibility.

We are therefore for progressive income tax, based on the ethical consideration that those who can contribute proportionally more do so. As regards VAT, while it has its advantages, it also tends to be regressive, in that low-income families who spend almost all their income on consumption pay more VAT proportionately. For this reason, AD would support schemes that keep VAT rates low on essential items that take a high proportion of expenditure by low-income families.

As regards taxing environmental damage, AD believes that products which are harmful to the environment, property speculation and other unsustainable practices should face a higher tax burden. On the other hand, "goods" such as labour should face a lower tax burden. We also agree that while small businesses should face a lower tax burden, taxes on banks should increase.

In the prevailing global scenario, fiscal crisis is becoming increasingly common. Governments are increasingly spending more than they earn and, with challenges in areas such as pensions and health, it is difficult to imagine otherwise, unless one is to believe populist rhetoric. In Malta, such cheap discourse is heard, for example, with regard to pension reform.

The stark truth is that if nothing is done pensions in the near future will have much lower purchasing power for the recipients while at the same time posing a higher burden on public finances.

While responsibility should guide political decisions on fiscal policy, one should also keep in mind that such decisions are never "neutral" or simply "technical". Ultimately, choices have to be made and someone has to foot the bill. Whether it is low- or middle-income earners, speculators, big businesses, environmental wreckers, innovators or so forth depends much on various economic, political and ideological factors.

The author is chairman of Alternattiva Demokratika - the Green party.

No comments: