Honestly, we need to talk about tax

Honestly, we need to talk about tax

by Derek Brien and Nikunj Soni

Government is complex, and funding what it does is difficult. No one want to pay more taxes. Everyone wants more and better social services and infrastructure. Someone has to pay for it. Over the past few months, the Vanuatu Government has been reviewing its tax structure. At the same time, the finishing touches are being put to a new National Sustainable Development Plan. Together these should define the country’s development aspirations, and how they will be financed. Drawing on 36 years of bitter-sweet experience, and in light of the new global development agenda and goals, these processes warrant detailed scrutiny and an inclusive national conversation. To be meaningful, that conversation needs to be informed by relevant research and analysis, and be contextualised to the reality on the ground.

So what is the reality? First, we need to be clear that Vanuatu alone cannot afford to fully implement either its own national development plan, let alone the new global goals. Indeed the current tax review is not premised on improving services such as health and education, but is in response to the pressing need to repay loans taken out by successive governments. In a 2013 discussion paper, the Pacific Institute of Public Policy flagged growing concerns with money being borrowed for ill-conceived projects, and lending based on flawed analysis and predatory practices. Lamenting on past mistakes helps learning for the future, but does little to solve the current problem.

What we need now is a detailed examination of all the options available to get the government out of its predicament. The revenue review task force is rightly examining a range of measures, including perhaps the most controversial – the introduction of corporate and personal income tax. However, as we await the report of the task force, and in the absence of rigorous independent analysis, the conversation remains steeped in hearsay and the advocacy positions of various interest groups.

The main business lobby group, the Vanuatu Chamber of Commerce and Industry, has made its position very clear in terms of the income tax. It has recently released a report from the Lithuania based Lewben Group (the parent company of one of the chamber’s members, the Pacific Bank), which strongly advocates against income tax, and instead recommends raising taxes on consumers by increasing the rate of VAT and selling assets to pay government debt. Disappointingly, this report is bereft of analysis. There is no study of tax scenarios, who they would impact, or how much would realistically be collectable given loopholes, administrative capacity, and so forth. The learning to draw from other countries/territories is limited given the comparison of significantly different circumstances and structure of economies. And perhaps not surprisingly, the report totally excludes any discussion on subsidies, exemptions and tax breaks currently enjoyed by segments of the private sector.

None of this is to suggest an income tax as the silver bullet. If our policymakers are to make informed decisions, we need to draw out and discuss the facts. How much would a personal or corporate income tax raise given most formal employment is in the public sector (i.e. government essentially paying itself) and the inherent difficulties of enforcing company tax? How long would it take to make a return, if any, on the investment to establish and manage a tax collection system? How would a VAT increase impact on the besieged tourism industry, and a population struggling to make ends meet? How can existing revenue compliance be enhanced, including closing loopholes, cracking down on avoidance and ending non-performing subsidies and exemptions? How can the range of small fees and charges be rationalised to reduce the cost of collection, and improve the ease of doing business in Vanuatu? In light of revenue concerns, how should we proceed with trade agreements, such as PACER Plus? Similarly, the sale of government assets needs to be considered as a financing measure rather than a revenue measure, and bearing in mind it was tried under the ill-fated Comprehensive Reform Programme (CRP) and did not work. The question here is how can the major state owned enterprises contribute to the budget, like the National Bank, and not draw from it, like Air Vanuatu? This suggests a problem of management and interference, rather than ownership.

In order to fully address these questions, we need to go back to the reason we are in this mess. Is it more a problem of poor borrowing and spending than one of revenue? To guide where we are in terms of revenue collection, how do we compare to like economies on the measure of tax as a percentage of GDP? If expenditure is part of the problem, how can it be part of the solution? What non-revenue measures can be enacted to ease the current situation, including: refinancing, debt forgiveness, cutting back on poor spending decisions, reviewing existing contracts, and instating strict contracting/procurement processes? Can we avoid repeating mistakes into the future by putting a moratorium on new borrowing?

Given how serious the financial situation appears, raising VAT might not be avoidable but this should not be a stand alone measure nor simply coupled with a fire sale of state assets. Importantly, it would need to be combined with impact mitigation for the poorest and most vulnerable in our communities by enacting strategies such as reducing small business license fees, reducing or eliminating school fees and raising the minimum wage.

Just as government is complex, there is no simplistic solution to the current predicament. An informed national conversation will help us navigate the complexities, and empower the government to instigate reforms in the best interests of the people they represent.

About the authors:

Derek Brien is co-founder and executive director of PiPP. In recent years his focus has been on advising regional governments and agencies during the international negotiations that gave rise to the new global Sustainable Development Goals, and he is now working to support their implementation. Born in Ireland, he grew up in Australia and has called Vanuatu home for the best part of the last decade.

Nikunj Soni is co-founder and board chair of PiPP. He has worked extensively on economic and public financial management issues across the Pacific since 1996. He currently provides senior public financial management advice to the governments of Timor-Leste, Papua New Guinea and Sierra Leone. He has an MPhil from Oxford.

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