New bank taxes explained
What is the size of the budget?
FOR THE financial year 2014-2015, the Government has proposed spending $540 billion. Taking inflation into consideration, the real total budget expenditure has not changed significantly relative to last year.
The Government recently discussed how it plans to finance this $540 billion; from existing taxes, other non-tax revenues as well as new taxes to fill the $6.7 billion gap in the Budget. Finance minister Dr Peter Phillips outlined that the revenue measures are grounded on tax reform, including amendments to improve tax-collecting efficiency and effectiveness.
What are these new revenue measures?
The revenue measures for the 2014-2015 financial year include:
1. Modification of the alcohol tax system, making the tax the same on all alcoholic beverages. Beers and stouts will attract the same tax rate as wines and spirits, including white overproof rum, effective April 22.
2. Increasing the age limit of second sale vehicles from eight to 10 years on which they will charge GCT, effective April 1.
3. Modification of the import duties on specific motor vehicles; including lowering the customs duty on cars with engines two litres and above.
4. Increase in premium tax for regionalised and non-regionalised life assurance companies.
5. Increase in investment tax for insurance companies.
6. Increase in the asset tax.
7. Redirecting the special consumption tax from the road maintenance fund to the central government.
8. Increase in the general personal income tax threshold from $507,312 to $557,232 per annum, effective January 1, 2015 - for which they will lose revenue, but you have to earn income of more than $557,232 before the Government starts withdrawing tax from your pay.
9. The most controversial of all is the introduction of a tax on bank and financial institution transactions and enactment from securities dealers. The tax will be charged on withdrawals from banks and financial institutions, whether inside the bank, from the ATM or on the Internet. Also, money transferred between persons will also be taxed, with the exception of transfers between the accounts of the same person at the same bank. Tax will also be collected on any payments made by license securities dealer to or on behalf of its account holders to a third party.
How will this tax work?
The rates are as follows: for withdrawals less than $1 million, 0.1 per cent will be collected in taxes, if the amount is between $1 and $5 million, 0.09 per cent will be collected in taxes, between $5 and $20 million 0.075 per cent and on transactions greater than $20 million, 0.05 per cent.
For example, if you withdraw $60,000 for the month, you will pay $60 in taxes (three $20 coins), if you withdraws $600,000 for the month, you will pay $600. The estimated revenue gain is approximately $2.2 billion.
Why the controversy?
This specific aspect of the new tax system has been the topic for discussion across the island for the last week, especially since people are unhappy with current bank fees as they are. Most people are under the impression that this new tax will reduce business and force individuals and companies to use the banking system less.
The truth is, from an economics as well as statistics point of view, the sums being collected, per person, is really insignificant and should not be causing such a scare. Furthermore, if the Government does not tax now, they will have to borrow and tax later. This will add to the current problem significantly.
In my opinion, it's better to pay an insignificant amount now to have smoother economic conditions later than to borrow more now so that we find ourselves in worse problems later.
Is this type of tax new?
This type of tax has been employed in several countries including Australia, Argentina, and Brazil. Australia was the first to introduce a tax on banking transactions in 1982. At a time where most governments have exhausted the traditional means of tax collection, countries in Latin America introduced the tax.
Argentina introduced a tax on banking transactions in 1984, which only lasted for eight years, as it was cancelled in 1992. Brazil successfully introduced a tax on banking transactions from 1993 to 2007; the tax rate here was between 0.25 per cent and 0.38 per cent. The main supporting arguments for a tax of this nature are that it is efficient, difficult for people to evade, and less costly than other tax methods.
Cintra et al (2009) found evidence to suggest that tax on banking transactions is one of the most efficient, using Brazil as a case study. They argued that globalisation has been eroding the efficiency of traditional types of taxes.
Dr André Haughton is a lecturer in the Department of Economics at the Mona campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email firstname.lastname@example.org.