In responding to comments made by Dr Roger Hosein regarding the impracticality of lowering the VAT to 12.5 per cent from its current 15 per cent rate, Dr Keith Rowley stated the following:
1. "Clearly, the UNC and its friends have no interest in lowering the cost of living in Trinidad and Tobago;" and
2. "He has ignored the fact that after the PNM adjusted the income tax regime in 2006, by increasing the personal allowance from $24,000 per year to $60,000 per year and reducing the overall tax rate to 25 per cent, the collection of personal income tax increased by over 50 per cent, from $4 billion to over $6 billion."
Clearly it seems that the PNM had no understanding of the way economics work when they were putting their manifesto together. That said they are correct in that, historically, the reduction of income taxes has produced an increase in tax revenue in countries across the globe.
This comes as a result of the positive impact that lower tax rates have on employment, production and output, due to the incentives provided to increase these activities.
But whereas the reduction of income tax directly relieves tax burden on individuals, VAT is infinitely more complex and therefore its reduction does not guarantee savings by consumers. For example, I am sure we all remember the numerous instances in which food prices were reduced by the current government, either permanently or temporarily, however these discounts were not always realised by the public as a result of the capitalistic manner in which merchants conduct their businesses.
In the cases in which flour was reduced, bakeries refused to lower their prices, citing the reason that they had purchased their main ingredient before the reduction had commenced, even though they would have also purchased flour for future use, during the time of these concessions.
It is therefore not unusual to assume that businesses would take full advantage of this VAT reduction to increase their own profits, while maintaining the current prices of goods and services that they provide for sale.
Many supermarkets, fast food restaurants, parlours, hardwares, convenience stores, salons and basically every retail store in the country has their VAT calculated in their advertised prices. Take fried chicken for instance, where a two-piece combo is currently $28, which means the net cost is $24.34 and the 15 per cent VAT included in the price is $3.66. With the proposed reduced VAT rate of 12.5 per cent however, the price of the same combo should now be discounted to $27.38, but I have no doubt that this price will not be reduced, and as such, the chain will obtain an extra profit of $0.62, as has occurred in the past. And this goes for all of the other businesses I listed as well, because why should they reduce their prices if customers are already willing to pay full price.
Now this will also negatively impact the revenue collection as well, because not only has the purchasing power of money not increased as expected, but the VAT has been reduced meaning those same companies, now including the manufacturers, distributors and importers, are now contributing less to that agency.
And while this reduction may have an effect on inflation in the long term, this will definitely cause a deficit in the revenue collected in the interim. As such the government will lose, the citizens will lose and the business owners will be laughing all the way to the bank.
The only substantive item this reduction may affect is vehicle fuel, although with the subsidy as high as it is, I don't have much hope for that either.
Once again the PNM have failed to put any substantive thought into their measures, hoping that their audience will be too swept away in its grandeur to pay attention to any details. Because, aside for the reasons mentioned above, there is also another aspect that they have neglected in proposing the reduction of the price of VAT, which is the seven thousand non-VAT items already available to consumers.
So how they expect that a 2.5 per cent reduction of nothing will make any impact at all, either to the consumer or the Government, is something the PNM still needs to figure out. –Ravi Maharaj