Payroll Taxes vs Consumption Taxes - 05/11/14 11:00 AM
Pay as you earn (PAYE) taxes are taxes on income assessed according to the Income and Business Tax Act.
In Belize, only those earning over $25,000 per year pay these taxes, at a rate of 25%. This is in simple terms, as the amendment to the Act of December 2010 is a little more complicated than that….in that persons earning between $25-30,000 get to deduct most of their income….however, persons earning over $30,000 only get to deduct $19,600.
What this means is that a person earning $35,000 should get to deduct $19,600 and pay 25% tax on the difference of $15,400, which would be $3,850….thus taking home $31,150.
A person earning $50,000 should get to deduct $19,600 and pay 25% tax on the difference of $30,400, which would be $7,600….thus taking home $42,400.
In 2012-13, GOB reported collecting $59.3 million in PAYE taxes….and projects $60.4 million over the current year….a growth rate lower than the projected rate of inflation….which means that even the high income earners will see a decline in real income.
This means that GOB collected 25% on $237.2 million of income….over and above the $19,600 deduction that is allowed.
If we assume that all these high earners earn the minimum of $30,000 per annum….each paying tax on $10,400….then that would indicate that the number of persons contributing to PAYE taxes would be 22,807.
The total work force is in the range of 150,000…..hence, at maximum, only 15% of the work force is earning over $30,000. Since many are known to earn much more than $30,000, this percentage is realistically in the range of 10% of the workforce….or 15,000 persons.
When consumption tax was first introduced in Belize as Value Added Tax (VAT) at a rate of 15%….the argument was presented as a strategic shift away from taxes on income and towards taxes on consumption. This was following a world-wide trend at the time. To sweeten the pot at the time, GOB started payroll tax deduction at around $12,000 per annum….and further deductions came with almost every political campaign after that, promising further increases in payroll deductions….until the point where it has reached currently.
Since then, the VAT was change to General Sales Tax (GST) at a rate of 10%, and subsequently increased to 12.5%…..with a wide range of exceptions and exemptions, which randomly favors some producers and imported products, and not others. So…the “strategy” to put in place consumption taxes has been implemented…..but that of shifting away from taxes on income seems to have been stalled since 2003. The $60.4 million from PAYE is too sweet to let go….
Belize has accepted the blows of the stick….but only half of the carrot that was promised has been delivered.
Has Belize abandoned the “strategy” upon which it based the introduction of “consumption tax”?
The reality is that Belize went about “shifting away from taxes on income” using a socialist bow and arrow argument of “those who earn more should pay more”….eliminating ALL taxes on income for persons under a certain randomly chosen threshold (playing gods)….and keeping relatively high taxes on the higher income brackets…punishing those who grow their income…and rewarding those who stay within the lower brackets of income. Essentially playing Robin Hood…
The stagnation in the process of repealing payroll taxes may be indicating that Government believes it can hold on to the new consumption taxes….even talking about raising them from time to time….and still hold on to the payroll taxes on those with higher incomes (since they are few they will keep their mouths shut?).
In other words, have their cake and eat it too….
This would be unfortunate….and downright dishonest….as the potential yield from this process is yet to come. It is the promise of a big boost in savings and investments by those in the economy that have the ability to save and invest. Those in the lower brackets of income have basically shifted from paying payroll tax to paying consumption tax….they are no better off….in fact, with poverty rates having exploded over this period of transition, it can be argued that they are much worse off.
The expectation was that the middle and upper income groups would have over the process been freed up from payroll taxes….and these would have been the burgeoning entrepreneurial class starting up new businesses and creating new employment opportunities. They have not been freed up…so this has not yet materialized.
So….where do we go from here?
1. The rate of payroll tax should be decreased to 10%, with deduction of $20,000 allowed.
The person earning $35,000 would now pay 10% on $15,000, or $1,500, taking home $33,500….$2,350 per year more….which he could invest in sending his kids to a better school…finance an addition to his home…take his family on a short vacation….as he so pleases.
The person earning $50,000 would now pay 10% on $30,000, or $3,000, taking home $47,000….$4,600 per year more….which he could use to finance a home which he can rent as a part of his pension plan….or to finance the start up of a home-based business venture that can eventually lead him to working for himself and creating jobs for others. There would be a boom in housing construction and employment. To see a similar boom in entrepreneurial investments, #2, #3 and #4 would have to be implemented, since the current high rates are what make it impossible to make profits from honest investments in Belize….discouraging entrepreneurial risk taking.
Persons earning below $20,000 will not be affected. Those earning between $20-30,000 will also not be affected, as a result of benefits from #2 and #3.
2. The government revenues from PAYE taxes would decrease by about $20 million as a result of #1, therefore it has to make it up…..by lowering the GST to 10% in non-discriminatory fashion, charging it across the board. The resultant increase in GST revenues would allow for reductions in other taxes, including but not limited to those suggested below. However, this cannot be done on its own, as it would raise the prices of basic commodities now exempt from GST. It would have to be accompanied by #3 and #4. A phased-in approach over a specified timeline would allow for predictable forecasts and programming by all….so that the softest landing on the desired competitive and productive plain would be achieved within a 2-3 year period.
3. Removal of taxes on fuel, except the 10% GST, so that the pump price of fuel at current prices would reach around $7.50 per gallon….a reduction of around 50% from current prices.
4. Reduction of business tax to 1% of sales, across ALL businesses that operate in Belize, no exemptions nor exceptions….no Hotel Tax. All new businesses should be allowed to deduct 90% of the business tax that they pay for the first three years, to allow them to start to make profits before taxing them.
This article was written by Richard Harrison, Belizean investor in production and services businesses in Belize. He holds a Masters in Business Administration degree from Lancaster University.