Data presented to parliament in February and July shows that 62 per cent of self-employed persons declare incomes of less than Lm4,300 or a sheer Lm358 a month.
Apart from raising doubts on Malta’s tax compliance rate, these statistics raise questions as to whether the Maltese tax system is simply too burdensome and complicated to encourage compliance.
Judging from income tax declarations, self-employed persons are worse off than any employed person.
In fact only 43 per cent of employees declare incomes of less than Lm4,300. Within this tax bracket, self-employed enjoying a married tax status do not pay one single cent in income tax while those paying single rates pay between Lm135 and Lm190 a year.
Asked whether he believed that 62 per cent of self-employed earned less than Lm4,300, Parliamentary Secretary Tonio Fenech told The Malta Financial and Business Times: “I do not want to enter into a controversy every time… I already replied this during a press conference on this subject but you keep on pestering me every four days with the same questions.”
In fact this newspaper had only asked this question on April 5 after a parliamentary question had revealed that only 606 self-employed persons had declared incomes of more than Lm16,000.
Tonio Fenech replied that a “careful and objective analysis shows that taxpayers can be more reasonable in their income declarations.”
Yet back then it was still not known that 62 per cent declared less than Lm4,300.
The director-general of the Chamber for SMEs (GRTU) Vince Farrugia was not surprised by these statistics. “Unlike salaried employees self-employed persons have to delete a number of costs from their total income. Growing costs are eating in to the income of these families.”
Vince Farrugia also argued that the popular distinction between self-employed and employed persons is based on prejudice rather than on reality. “First of all, tax avoidance is not the sole prerogative of the self-employed. Even employees try to avoid tax through fringe benefits. Secondly just as there are employees who struggle to make ends meet, a large number of self-employed are also in dire straits.”
Farrugia added that the statistics in question also include self-employed persons like village corner stores, cleaners and other people engaged in small-scale business activities.
A flat tax?
The statistics also raise the questions whether the Maltese tax system is simply too burdensome and complicated to encourage tax compliance and economic growth.
Many of the new and prospective EU members states like Slovenia, Slovakia and the Baltic states have adopted a simpler flat-rate tax system.
The flat-rate income tax system was pioneered by Estonia, which has been in the vanguard of free-market reforms since it regained its independence from the Soviet Union in 1991.
Estonia’s introduction of a single rate of income tax in 1994 was quickly followed by its Baltic neighbours, Latvia and Lithuania. Since then the flat-rate tax has been adopted in Russia, Serbia, Ukraine, Slovakia, Georgia, and now in Romania.
Even the Spanish socialist government has commissioned a study on whether a flat tax is feasible in a country where one-fifth of the economy is the black economy. In Spain this tax regime is being considered to bring this part of the economy out in the open and tax it.
Because it offers a lower rate of taxation, the flat tax reduces the incentive for tax evasion.
Romanian economist Andrei Grecu, who recently published a paper for the London-based think-tank the Adam Smith Institute, advocates a flat-rate tax for Britain. “Because it offers a lower rate of taxation, the flat tax reduces the incentive for tax evasion. People are more willing to pay the correct tax burden when the tax is lower,” argues the Romanian economist.
According to the same economist the idea of a flat tax is to bring the rate a little bit lower than the highest or even the average rate and to encourage economic activity.
The logic is that: if you increase economic activity, it will bring more revenue to the government.
But research conducted in Russia by the Institute of Fiscal Policy has come up with different findings. One of those involved in that research was German economist Alexander Klemm. “There was some improvement in tax compliance and absolutely no effect on labour supply or work effort,” he says.
In the West, the flat-rate tax has not made much progress beyond a circle of free-market economists. According to the German economist Klemm income tax is usually the most efficient method of redistributing income from the better-off to the less well-off and the introduction of a flat-rate tax limits income redistribution.
The discussion on alternative tax regimes has made little inroads in Malta but the data presented in parliament shows that the existing tax regime is not paying off.