To tax or not to tax

On Tuesday, officials of the International Monetary Fund (IMF) issued a stark warning about the damage caused by the covid19 pandemic.

In its World Economic Outlook, the IMF projected the world economy will contract by three per cent, an about-turn from earlier this year when the fund forecast 3.3 per cent growth. The fall, the IMF said, could be far more severe than the last recession, when the world economy contracted by less than one per cent between 2008 and 2009. A three per cent decline will represent the worst convulsion since the Great Depression. That’s the alarming context in which the debate about whether to grant tax relief should be understood.

A survey by the American Chamber of Commerce (Amcham) found that companies would like to see deferral of corporate taxes and VAT payments, reduction of import duties, among other things. A cluster of the country’s biggest business groups, including Amcham, the Energy Chamber, the Chamber of Industry and Commerce, the Manufacturers’ Association, and the Confederation of Regional Chambers has called for a tax credit on salaries for companies that are unable to make a profit during this time.

But Finance Minister Colm Imbert has argued tax relief would be counter-productive at this time. According to him, deferring taxes would be like cutting off your nose to spite your face.

“We have to give people help,” he said. “Where is money supposed to come from? We need every single cent.”

It’s easy to see both sides of this coin. On the one hand, if the State moves forward with providing cash support to businesses and individuals, it seems inefficient to have the flow work two ways. Since the net effect could well be one flow cancelling the other out, the time and effort required to process payments to the State could be reserved for tending to other matters.

Further, businesses can’t pay taxes if they no longer exist. There’s a long-term view to keep in mind in which forbearance in the short-term might be a small price for the State to pay in terms of long-term revenue collection. The economy is on a knife’s edge and how we manage scarce resources in a health crisis will be critical – are taxes worth the death of business?

On the other hand, it’s only fair for businesses that have already made profits to pay their taxes.

Further, it cannot be forgotten tax payment is essential in supporting the systems which have been set up to provide relief and support to the most vulnerable in society. On a monthly basis, at least 168,950 people turn to the State for support to the tune of $437 million. That can only happen if there is revenue coming in from sectors better able to afford it.

But there’s something else to consider. Tax breaks could help stimulate the economic activity we will need down the road. Even if they must for now, businesses can’t take the backseat forever.