Tax re­duc­tions only way for­ward

Financial Mirror (Cyprus) - - FRONT PAGE -

The phi­los­o­phy and poli­cies of dra­co­nian aus­ter­ity are be­ing chal­lenged in the EU and beyond at a time when the Cyprus Min­istry of Fi­nance has sub­mit­ted its 2015 Bud­get to the House of Rep­re­sen­ta­tives for de­bate. This ne­ces­si­tates an as­sess­ment of the broader eco­nomic en­vi­ron­ment as well as the pur­sued eco­nomic pol­icy by the gov­ern­ment.

The Euro­pean Sta­tis­ti­cal Ser­vice re­cently changed the way the GDP is cal­cu­lated so that this fig­ure would ap­pear higher. With this method­ol­ogy, some in­di­ca­tors such as the bud­get deficit and the pub­lic debt would ap­pear bet­ter (i.e. lower). This move is in­dica­tive of the pres­sures that ex­ist. But be­sides the ef­fort ex­erted to cre­ate a bet­ter pic­ture it is im­por­tant to fo­cus on the sub­stance and the harsh re­al­i­ties.

There is a se­ri­ous un­em­ploy­ment prob­lem while non­per­form­ing loans (NPLs) ap­proach 50%; in March 2013 they were only 25%. At the same time, eco­nomic ac­tiv­ity is still de­clin­ing. There is also a se­vere de­cline in con­struc­tion and the re­lated sec­tors, a se­ri­ous liq­uid­ity prob­lem and dif­fi­culty in sus­tain­ing many small and medium en­ter­prises (SMEs). It is im­por­tant to un­der­stand the rea­sons for th­ese prob­lems: over and above the poor eco­nomic sit­u­a­tion, the in­creased tax­a­tion and par­tic­u­larly the prop­erty taxes in­tro­duced are not help­ing the sit­u­a­tion. On the con­trary, they are deep­en­ing the cri­sis.

It is im­por­tant to un­der­stand that the pri­vate and pub­lic debt can­not be re­paid while the re­ces­sion per­sists. One should also un­der­stand that the prob­lem of the NPLs can­not be ad­dressed only by fore­clo­sures. An en­tirely new ap­proach re­quired fo­cus­ing on growth.

For this to hap­pen, re­duc­tion of tax­a­tion is es­sen­tial. In this re­gard, de­spite the in­creases in tax­a­tion, the state’s rev­enues ap­pear lower. This ar­ti­cle high­lights the im­por­tance of just two of the pro­pos­als that the Cen­ter for Euro­pean and In­ter­na­tional Af­fairs, Univer­sity of Nicosia has sub­mit­ted in the past few months.

1. Loan prac­tices:

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After March 2013, strict re­stric­tions and thor­ough checks are be­ing im­posed by the banks to grant loans which has a neg­a­tive im­pact on eco­nomic ac­tiv­ity as we have passed from a state of great im­pru­dence to suf­fo­ca­tion. This should be re­versed.

2. Com­pre­hen­sive plan­ning.

fis­cal, de­vel­op­men­tal and so­cial pol­icy

In this con­text the fol­low­ing sug­ges­tions are made: i. A new tax re­form which will take into ac­count the so­cial di­men­sion as well as a set of in­cen­tives for in­vest­ment, sav­ings and en­cour­age­ment of spe­cific ac­tiv­i­ties. The phi­los­o­phy of the en­tire tax sys­tem will in­cor­po­rate the prin­ci­ple “low tax rates and high penal­ties for non-com­pli­ance”; ii. Re­duc­tion of the max­i­mum rate of the In­come Tax from 35% to 30% and sim­i­lar ar­range­ments there­after; iii. Re­duc­tion of the VAT from 19% to 15% and re­duced-VAT from 9% to 7%; iv. Re­duc­tion of the Cor­po­rate Tax from 12.5% to 10%; v. Re­duc­tion of the con­tri­bu­tion to the So­cial In­surance Fund from 7.8% to the pre­vi­ous level (6.8%); vi. Re­duc­tion of the tax rate on in­come from de­posits from 30% to 9.5%. The ob­jec­tive is that the spe­cific tax can re­turn to pre­vi­ous lev­els so as not to de­ter de­pos­i­tors and for­eign in­vestors; vii. For eco­nomic sta­bil­ity, bal­anced bud­gets should be sought within a frame­work in­volv­ing a longer pe­riod of time; viii. Re­duc­tion and ra­tion­al­i­sa­tion of the prop­erty tax. As it stands the gov­ern­ment’s pro­posal for prop­erty tax (in 2013 prices) is not sat­is­fac­tory. This is­sue is im­por­tant and the pro­posal should be ad­dressed sep­a­rately: ix. No ad­di­tional salary cuts should take place as this would deepen the cri­sis; x. Re­duc­tion of pub­lic spend­ing as a share of GDP to be­low 40% in the long term.

The im­ple­men­ta­tion of th­ese two pol­icy mea­sures will lead to a quick and sub­stan­tial stim­u­la­tion of eco­nomic ac­tiv­ity with very pos­i­tive im­pli­ca­tions.

It is widely noted that lower tax rates do not nec­es­sar­ily lead to a re­duc­tion of rev­enues; on the con­trary, they will en­cour­age en­hanced in­vest­ment and con­sump­tion as well as lead to the cre­ation of new jobs. By the same to­ken, the in­creased liq­uid­ity will boost the econ­omy.

Th­ese de­vel­op­ments will also con­trib­ute to ad­dress­ing the prob­lem of NPLs. Above all, the core mes­sage will be that the state has again taken hold of the sit­u­a­tion in its own hands. This would come at a time of in­creas­ing un­cer­tainty in the broader Euro­pean en­vi­ron­ment and with a grow­ing tide call­ing for the re­think­ing of the Eu­ro­zone’s recipes.

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