Progressive income tax Potential benefits v/s likely risks |04 September 2017
Low- and middle-income families in Seychelles are expected to benefit the most under the progressive income tax system that will come into operation from January 1, 2018.
This is part of the reform of the country’s taxation system and discussions on the subject dominated the special meeting of the Cabinet on Wednesday afternoon at State House.
President Danny Faure chaired the session which focused mainly on options for the reform of the taxation system, drawn up following discussions which the Ministry of Finance, Trade and Economic Planning had held with the private sector and other stakeholders.
“We had been talking about progressive income tax for a while now and it was important that we consulted our stakeholders. Consultation is still not over yet and we want our stakeholders to bring forward their suggestions and concerns about how the progressive income tax will either be of benefit or detrimental to their organisations,” said Finance, Trade and Economic Planning Minister Peter Larose.
He added that the government has to deliver on the promise they made to the Seychellois people.
“We want to see people bring home more money as the cost of living is high in Seychelles. This will help the families to have a better life. It has taken a while but we will get there. We have to deliver on the promise we made to the Seychellois people,” explained Minister Larose.
Asked by Seychelles NATION to comment on the government’s decision to introduce progressive tax as of next year, A G Yakub,ex-International Monetary Fund (IMF) budget advisor and current chief executive of Penlac and Chaka Brothers, said people can sometimes get emotional or have strong opinions when talking about the amount of money that gets taken out of their pay slips in the form of taxes.
He adds that this is a popular debate that has been around for decades. “The debate usually includes the pros and cons between progressive, regressive, and proportional (or flat) tax systems,” he said.
In simple terms, a progressive tax is a tax where the tax rate increases as your income increases.
“If the Seychelles government’s primary aim is to generate more taxes to finance the national budget, then a progressive income tax system probably help towards that,” said Mr Yakub.
He added that his personal preference is for the government to address the problem of insufficient revenue another way: Let us get to the root cause of the government revenue problem instead of attending to the symptoms. I would like the government to get a better grip of its public expenditures and prioritise as well as focus more on the quality of its expenditures and its deliverables so that it can eventually operate a ‘lean and mean’ budget. Far too much of our tax payer’s money is going into unproductive, recurrent expenditures every year and, in return, we continue to get weak or poor public services.
If revenue generation is not the prime target of the government, then one can argue in favour of a simplified flat rate of income tax because it does not discriminate against those with skills and talent who quite rightly earn more. A flat tax rate will also create a more attractive working environment for FDI.
The progressive tax system carries both pros and some cons.
The pros of a progressive tax system
1. It narrows the income gap and provides some level of income equality
As citizens of Seychelles, most of us have to contribute to the funding of our government’s national budget from which we enjoy free health, education and other social services. But how much is a fair amount? In a progressive system of taxation, those who earn less are required to contribute the least amount for services to be rendered. This keeps the income gap closer than it would be otherwise.
2. It encourages social justice
People often say that money does not buy happiness, but it does buy food, clothing, and shelter. Not everyone can afford these basic essentials of life. A progressive tax system helps our government to provide help to those who need it so that everyone has a chance to pursue their dreams to the best of their abilities.
3. It generates more government tax revenue
If everyone paid the same percentage rate on their income, then one can argue that people who earn less would wind up paying a greater total amount of their income than the rich. This can create a system where less money would be collected instead of more money. The progressive system of taxation takes more when people make more so that the entire nation benefits instead of just a select few.
4. It gives people a safety net in which they can operate
When a person’s income falls, so does his/her tax responsibilities. This provides a certain level of protection or safety net to those households who have experienced unexpected losses.
The cons of a progressive tax system
1. It can be seen as discriminatory
The more well-off or wealthier a person happens to be, then the greater the percentage of taxes they’ll end up paying in a progressive taxation system. This essentially discriminates against those who are able to make more or earn more from their creativity, their specific skills, and/or talent. Such a situation can be discouraging for those with higher qualifications and skills. At a time when there is a significant mismatch of skills in the local job market in Seychelles, we should seriously think about that.
2. Those who barely break into a new tax bracket may lose their additional earnings
If you use the current Seychelles Revenue Commission’s income tax calculator online, you will find that different tax rates are being applied to those on monthly incomes of between say the R9,000-R10,000 range that keeps their net income at around R8,556 for instance. That is quite unfair. Those who barely break into a new taxation bracket may find themselves with less overall cash than if they’d stayed below the tax-free pay bracket of say, R8,555.50 per month.
3. It encourages the wealthy to be less transparent
A recent article in the Washington Post newspaper claims that “In 2012, billionaire investor Warren Buffet reported paying just over 17% of his total income in taxes. In comparison that same year, the progressive tax system in the United States of America required households which made above US $35,000 per annum, but below US $86,000 per annum, to pay 25% of their salaries in taxes.” In theory, the progressive tax system may work for Seychelles, but in reality the wealthy may be able to take alternative income methods to limit their tax liabilities that the working public cannot take.
4. It creates some bureaucracy
It can take several hours to calculate income levels and file a tax return that is accurate. It can also take several hours to double-check that information to determine if it is accurate. There are other systems of taxation like the flat tax that require fewer hours to complete because there is less complexity involved, which can help people to become more productive in a number of different ways.
To conclude,Mr Yakub pointed out that the progressive tax system pros and cons show that it may not always be the best system of taxation.
“Many of the benefits can only be achieved with proper management of the system, which may not always happen. Do the potential benefits outweigh the likely risks of this system? That is a question which should be debated on a consistent basis,” he said.