Is a 25% flat tax good or bad for T&T?

In the 2001 fiscal year, the total revenue collected by the Government of Trinidad and Tobago was $14.3 billion, according to the 2005 Review of the Economy. In 2001, individuals contributed 16.6 per cent of total revenues as they contributed $2.39 billion in taxes to the Treasury. Eleven years ago, taxes on goods and services exceeded the amount of taxes paid by individuals, contributing $3.42 billion in revenues, which amounted to 23.7 per cent of the total revenues collected in the 2001 fiscal year. Taxes on companies in 2001 amounted to $3.29 billion. In the 2005 fiscal year, the Government collected some $4.25 billion in personal income taxes from individuals, which means that individual income taxes increased by 77 per cent between the 2001 fiscal year and the 2005 fiscal year. Personal income taxes in the 2005 fiscal year contributed 14.3 per cent of the country’s total revenue collection in that fiscal year, which was $29.64 billion.

 

At the end of the 2005 fiscal year, in his presentation of the 2006 budget, which was delivered on September, 28 2005, then Minister of Finance, Prime Minister Patrick Manning announced a series of taxation measures.

Taxes on companies in 2005 amounted to $13.97 billion, which is an increase of more than three times compared with the $4.57 billion collected in 2001. These measures included replacing the then current rates of personal income tax of 25 per cent and 30 per cent with a single rate of 25 per cent and increasing the personal allowance from $25,000 per annum to $60,000 per annum with effect from income year 2006. The immediate impact of increasing the personal tax allowance from $24,000 to $60,000 a year (or from $2,000 to $5,000 a month) and creating a flat tax at 25 per cent was that an estimated 300,000 taxpayers were removed from the income tax net altogether. This means that no one whose income is $5,000 a month or less pays any income tax in this country.

 

In the 2006 fiscal year, the amount of personal income taxes collected by the Government declined by 26 per cent from $4.25 billion the previous year to $3.15 billion. But for every year after that the Government’s total take from personal income taxes increased to the point that in the 2011 fiscal year the estimated tax take from individuals was $5.06 billion. This means that the Government’s tax take from individuals increased by 60.6 per cent between the 2006 and the 2011 fiscal years. But it also means that the contribution of individuals to total revenue declined from 16.6 per cent in 2001 to 14.3 per cent in 2005 to an estimated 11.2 per cent in 2011, when $45.1 billion was collected. The estimated contribution of companies to the Government’s coffers in the 2011 fiscal year was $22.77. This means that companies contributed a little over half of the total revenues collected by the Government in 2011 compared to 31.7 per cent in 2001 and 47.1 per cent in the 2005 fiscal year. Taxes on goods and service, which were 23.7 per cent of total revenues in 2001, fell to 15.3 per cent of total revenues in 2005 and to 13.5 per cent in 2011.

 

In speaking about the introduction of the flat tax of 25 per cent, the lowering of the top marginal tax rate from 30 per cent to 25 per cent and the increase in the personal tax allowance from $24,000 to $60,000, then Prime Minister Manning said: “The change(s) will result in an important simplification of the tax regime in that instead of the series of deductions which only benefit specific individuals, all wage earners will now get expanded relief. This means, Mr Speaker, leaving much more of the workers’ wages in their hands, so that they could improve their welfare and the welfare of their family. “Mr Speaker, this Government has considered the matter in depth and we believe that it is one of the best ways of having the broad mass of the population share in the benefits derived from the high oil prices. This is the concept of the energy dividend. The revision has another important effect. By simplifying the tax, not only have we made it easier for the taxpayer but we have also made it easier for the staff of Inland Revenue Department, who can now devote more of their energies to ensure compliance.”

 

One of the goals of all governments must be to ensure that a larger percentage of the income earned by people in that country remains in the hands of the earners, which would include employees and the owners of businesses. By allowing income earners to retain a larger percentage of their income, a government is facilitating the growth in the wealth of the population. Specifically, with regard to a resource-rich economy, I would submit that Mr Manning did the right thing in the 2006 budget by simplifying the tax structure and reducing the average tax liability of the population. This shift in the balance of tax collection from personal income taxes and taxes on goods and services to taxes on companies would have facilitated improved after-tax retention of income. Any tax changes that reduces the after-tax income of the population would be both negative and regressive and would contribute to a further impoverishment of T&T’s middle and upper income earners.