In The Wealth of Nations (Book V, chapter 2), 18th century economist Adam Smith outlined four principles that should govern the implementation of a system of taxation. These principles remain remarkably relevant today:
“I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.…
II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.…
III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.…
IV. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.…”
Governments all over the world use taxation (imposition of compulsory levies on entities or individuals) as a common method of raising revenue for Government operations and to promote wealth redistribution and economic stability. These purposes are quite noble. In explaining the different reasons for taxation, American economist, Richard A. Musgrave, distinguished between objectives of resource allocation, income redistribution, and economic stability. Neumark, Cox and McLure in an article entitled Taxation in Encyclopaedia Britannica, expounded on Musgrave’s position as follows:
“…the first objective, resource allocation, is furthered if tax policy does not interfere with market-determined allocations. The second objective, income redistribution, is meant to lessen inequalities in the distribution of income and wealth. The objective of stabilization — implemented through tax policy, government expenditure policy, monetary policy, and debt management — is that of maintaining high employment and price stability.
There are likely to be conflicts among these three objectives. For example, resource allocation might require changes in the level or composition (or both) of taxes, but those changes might bear heavily on low-income families — thus upsetting redistributive goals. As another example, taxes that are highly redistributive may conflict with the efficient allocation of resources required to achieve the goal of economic neutrality.”
Once the purpose is clear, consideration then has to be given to the method of taxation, whether direct or indirect. According to Newmark, Cox and McLure:
“Direct taxes are primarily taxes on natural persons (e.g., individuals), and they are typically based on the taxpayer’s ability to pay as measured by income, consumption, or net wealth….
“Indirect taxes are levied on the production or consumption of goods and services or on transactions, including imports and exports. Examples include general and selective sales taxes, value-added taxes (VAT), taxes on any aspect of manufacturing or production, taxes on legal transactions, and customs or import duties.”
Based on the explanation of the purposes and methods of taxation, one can deduce that the tax system in Anguilla is geared mainly toward revenue generation for the provision of Government services and economic stability. These taxes are a mixture of direct taxes (eg. social security deductions and the interim stabilization levy) and indirect (eg. Stamp duty on transactions, licence fees, customs duties etc.)
Regardless of the purpose and method of taxation, the question is whether regard is paid to the four principles enunciated by Adam Smith when consideration is being given to the imposition of taxes. Put in simple terms, the principles advocate that tax systems should be:
• reflective of persons’ ability to pay;
• certain;
• strategic in timing and method of implementation so as not to inconvenience the payer;
• non-intrusive and proportionate to needs of Government.
Recently, there was a fake news story circulated about the Government of Anguilla’s intention to impose new taxes this year. While the story was false, it prompted the sharing of more information on the part of our Government in relation to the conditions set out by the British Government for release of the £60 million in grant funds. The Anguillian newspaper has learnt that the issue of taxation was raised by the British Government as a means of Anguilla raising enough revenue to meet its expenditure obligations. The Government of Anguilla has, however, not agreed to this condition and is seeking ways to decrease expenditure instead.
What is alarming is that the issue of taxation could even be put on the table as an option by the British Government, on a people hit by the worst hurricane in history. Hurricane Irma has been catastrophic in more ways than one. Not only did it destroy homes and other buildings, but it destroyed livelihoods. Many persons are still jobless, living in dilapidated conditions and struggling to get on their feet. The tourism sector took a devastating blow and is still reeling from the effects, with properties slowly reopening as they rebuild from the rubble. The country as a whole suffered unbelievable damage and, while we are strong and we will build back, we still have a long way to go.
It would be a heartless, not to mention a nonsensical, act to impose new taxes or to raise taxes in these circumstances. Not only does it demonstrate a lack of appreciation and understanding of the true impact of the hurricane on Anguilla as a whole, but it disregards some of Adam Smith’s basic principles of taxation, outlined above, including the need to give consideration to persons’ ability to pay and the timing of the implementation. There could be no worse time to impose additional taxes than now, on a struggling people in a depressed economy. While we appreciate the grant funds from the British Government to assist with the rebuilding of key infrastructure, to couple it with increased taxation, which can only have an oppressive effect, is too high a price to pay.
I would therefore encourage Government to strongly resist all suggestions of imposing additional taxes at this time as they are likely to be more detrimental than beneficial in their impact. Rather, the focus should be on boosting investment in Anguilla by making the investment climate more attractive – and improving efficiency in the delivery of Government services. Both of these can realise increased revenue and decreased expenditure respectively, and set Anguilla on a quicker and less painful road to recovery.
