(Published in L"Express )
Based on the recommendations of the Appendix VI on Earned Income Tax Credit (EICT) in the IMF Art IV document of May 2014, Government has proposed the Negative Income Tax (NIT) in Budget 2017/2018. The IMF article argues that a EITC/NIT will generally augment the income of the poor and encourage labour force participation and employment. It makes the case for introducing an EITC for Mauritius because of its increasing income inequality, its relatively inefficient social safety net system, its low labour participation rate and high unemployment among the young and women.
Based on the recommendations of the Appendix VI on Earned Income Tax Credit (EICT) in the IMF Art IV document of May 2014, Government has proposed the Negative Income Tax (NIT) in Budget 2017/2018. The IMF article argues that a EITC/NIT will generally augment the income of the poor and encourage labour force participation and employment. It makes the case for introducing an EITC for Mauritius because of its increasing income inequality, its relatively inefficient social safety net system, its low labour participation rate and high unemployment among the young and women.
But the IMF article cautions us that we should not be in a
hurry to implement the EITC/NIT. Why because (1) it will impose too high an administrative
burden on the MRA given that only ¼ of the total workforce are currently filing
annual tax returns (2) the NIT has a high fiscal cost which will need quite
some fiscal space, much more than the returns from the solidarity levy . (The budget proposals on the NIT which borrows
heavily from Scenario I of the IMF
report which estimates the maximum monthly support of about Rs 1000 per
household to cost around 0.3 % of GDP) and (3)
greater attention and resources should be given to policy measures improving
labour flexibility and employability and reforming the present ineffective and
inefficient social security system and these should precede any NIT measures
which should only be considered as a longer-term option. On the last point it
is important to add that among the countries that have adopted a variant of the
EITC are US, UK, Australia, Finland, Ireland, Canada, New Zealand, Lithuania,
Korea, etc . All these countries have a
highly skilled and versatile workforce and have a continual and intensive process
of skill formation that enhances workers’ flexibility and employability.
Why the rush? To avoid the
national minimum wage issue or to score quick wins on the populist side of the
NIT !!! Is not irresponsible on the part
of our policy makers to adopt and implement part of the IMF recommendations
while neglecting that part which recommends that a proper assessment be carried
out on the objectives of NIT, the sizes of the potential benefits and
administrative costs and the availability of fiscal space over the medium term
before envisaging any NIT measure? When
it comes to the percentage rate of the NIT, is the rate proposed giving enough
for a humane standard of living without removing the incentives for earning
more on your own? Is it not presently a
poor or negative way of incentivizing self-sufficiency? At this stage of our
development, is it not another guaranteed income of the state that encourages
consumption rather than human capital formation?
When Friedman and before him Cournot, had recommended the
NIT, they were thinking of a different, radically improved and more efficient
form of welfare which some called “libertarian redistribution”. Will the NIT be
simply another add-on onto, rather than replace the large inefficient present
social safety net system? The NIT
measures, as per IMF recommendations, are premature. We have other priorities-
inter alia- an overhaul of the education system inclusive of a massive human
capital formation programme which will enhance employability of our youth and
women. We should be aware of our priorities!!!
Are we, given expectations of a consolidated budget deficit above 6% of
GDP and a level of debt higher than 66% of GDP by June 2018.?
