High income tax in PNG is a disincentive – POST-COURIER

BY BARNEY OREREborere@spp.com.pg

The subject of personal income tax that does not give a fair return to workers in Papua New Guinea has been talked about for a long time but it continues to fall on deaf years.

A year or so ago, a tax expert from the United kingdom who visited the University of Papua New Guinea raised the matter of high income tax regime in PNG. No one really took any notice of the academics views.

There was no reaction from the government.

Now were making whispers on the same topic. It is to be hoped that a follow-up will come by if theres any real seriousness involved.

Huge tax burdens and increasing law and order problems are the challenges facing the government.

Economic hardship of unprecedented dimensions, corruption, and unemployment are on the rise.

Fifteen years ago the Governor General, late Sir Silas Atopare, when opening the seventh parliament said PNG was facing many social, political and economic challenges. We suffered from prolonged and unmanageable level of inflation, he said.

It distorted our economic decisions, penalised growth and disadvantaged the already struggling families, said Sir Silas.

Unemployment and for the employed, the denial of a fair return to them by the tax system penalised successful achievement and kept us from maintaining full productivity.

But as great as our tax burden was, it had not kept pace with public spending.

For years, we had piled deficit upon deficit, mortgaging our future and our childrens future for the temporary convenience of a few, Sir Silas said.

When you assess it, the poor management of the country is being carried by the taxpayer.

The poor management of the country means the people cannot prosper; the tax burden is killing them and it is an unfair system.

The more economic troubles we get into the tax burden increases as a result, hoping that it will provide the solution.

But the mismanagement continues which means the taxing will still go on; potentially in an ever-increasing upward spiral.

This makes no sense if there are no results for the better..

HER MAJESTYS GOVERNMENT

The G-G is the Queens representative.

We have him because the Queen is far away in England; half way across the world.

She is the Head of State.

That is how we wanted it by becoming a member of the British Commonwealth of Nations at Independence and adopting the Westminster system of government.

It means the government of Papua New Guinea is Her Majestys government and the people of PNG are the Queens loyal subjects under her watch. We must understand this structure.

As great our tax burden is, the G-G pointed out it has not kept pace with public spending.

Law and order problems have become rampant and social problems are on the rise, predominantly to do with poverty.

The high income tax regime denies a fair return and penalises successful achievement and keeps Papua New Guineans from achieving full productivity.

The people is the countrys No1 resource. But they have been looked down on and they will not rise.

There is no innovation; they are dispirited and will not use their God-given talents. It is too expensive to live in a poor country. Many dreams have been shattered and there are fewer dreams out there.

The worker has less money in his pocket because the high income tax takes it from him.

The poorly managed economy in the same system means there are no jobs and the cost of living is too high.

It denies the human person from realising his full potential. In the final analysis this country is poor because its people are.

WHY PEOPLE ARE POOR

There are two reasons why we should worry about the poverty and the lack of jobs.

The first is what economists call human capital which means any nation relies on its people to create development.

If the population is healthy and well educated the country has the base on which to build and create jobs and wealth.

If the population is sick and poorly educated the opportunities for attracting investment and creating employment are bad and investment will go to other countries.

The second is that a poor and unemployed population still needs to eat and live under shelter and somehow it has to find the means to do this.

If there are no jobs available the only recourse is to crime.

The Australian National University has estimated that nearly 20 per cent of the total population of PNG towns are in some way dependent upon crime or prostitution for their living.

The level of crime and other lawlessness is now one of the major reasons businesses dont invest in PNG.

This applies to existing businesses as well as new business.

Almost every day we hear about how rich PNG is, how we have unlimited mineral resources or the potential to grow any sort of cash crop we want.

We had tremendous wealth from oil and minerals over the last few years.

Income from our primary products has been very high and we have watched our timber resources being harvested at record rates.

This has all produced income that should have translated into development.

SLUSH FUNDS

Instead the opposite has happened.

Three times in the 1990s PNG has come close to bankruptcy.

Some of the causes have been beyond our control but we have had to get to the edge of a very steep cliff before we realised that we have to do something about it.

The Slush Funds were increased year after year and yet services to rural areas got worse.

We never learned where all the money went. All we knew was that suddenly we did not have any more.

A government is no different to how a family works.

It gets money from taxes and other sources and it makes a budget for the year.

It will decide how much money it can borrow and how it can repay that money. When the government and the public service is running properly it follows that budget.

To manage a large organisation there has to be experienced and honest people running it.

Appointments have to be made on the basis of what a person has done before and what he knows about the job that he will be doing.

Part of that job is to advise governments that what they plan to do is illegal or will not be good for the country.

They should be able to give reasons and what will happen if the government or the minister insists on doing what they want.

In the end they have to do what the government of the day instructs them to do no matter if they think it is good or bad.

We have not followed this practice for many years now.

Appointments have been made not on the basis of what the person knows but who they know.

Ministers almost always sack the person in charge of their department when they get appointed. .

They replace them with people from their own party or people who they owe favours to and the person doesnt need to know anything about the job or have had any management experience.

The trend has been that these people have been appointed at larger and larger salaries and conditions packages, especially chairmen and managers of statutory institutions.

The person who has been sacked will be paid out, not like someone in the private sector for three weeks pay and other entitlements, but the whole of the contract.

We have allowed management of government to get so bad there is no care taken to see that government or the statutory body gets the best deal for the people. We continually read about contracts that are made for much more than they should be.

Corruption is bad because it means that our managers dont do their jobs and we dont get the best value for our money.

Corruption leads to lazy and bad management.

These conditions are not fixable by raising taxes or making people pay for them.

MINIMUM WAGE

Lifting of living standards for workers is a means of addressing poverty.

Responsible upward adjustment to wages is good for the national economy. In our capitalist-styled economy supply and demand is the main driver.

An upward adjustment in wages drives demand.When there is money in workers pocket they will spend on goods and service.

This will have the effect of generating economic and business growth.

Some years ago the General-Secretary of PNG Trade Union Congress, John Paska made these observations: Minimum wage earners spend nearly all their money onshore on local produce while those on the upper echelon of the wage structure tend to spend a high proportion of their income on offshore products and services. Luxury goods are mostly imported. They command prices that are beyond the minimum wage so it is those at the high level of the wage bracket that buy such goods. In the 1992 Minimum Wage Determination, minimum wage was slashed from K120 per fortnight to K45 per fortnight.

The 2008 Minimum Wage Determination set the new rate at K2.28 per hour or K182.40 per fortnight. The current rate is K3.50 per hour.

The negative impact of not being judicious enough can be seen clearly in the difference between the wage bill and the contribution of minimum wage earners.

Paska said wage economics, because of its intrinsic value to the economy had to be based on logic and economic sense.

The reason for the minimum wage slashing in 1992 was that cut in real wages would create the impetus for employment as employers would be incentivised to hire more workers.

While it was true that employers would be willing to pay wages to a certain point, it was also equally true that workers would be willing to accept employment when offered wages to a certain point.

Spending on luxury goods and services meant repatriating money offshore since most companies that engaged in such business had their roots outside the country.

The value of the minimum wage earner therefore was very vital to the growth of the domestic economy particularly in rural areas where most income earners shied away from.

The idea that workers somehow respond to robotic command at the flick of a finger by the employer was as archaic as the master/servant conundrum of serfdom and slavery. And yet it did happen and not just once but twice.

The first in 1992 Minimum Wage Determination and the second in 2000 Minimum Wage Determination.

The result proved disastrous, Paska said. There was no bump in employment period and that 10 per cent has remained static to this day.

It prompts the question of why there was insistence to pursue the same failed pathway. We had eight years between 1992 and 2000, sufficient time to analyse the data.

But we persisted with a failed prescription. The answer did not lie in econometrics but rather ideology.

Continued here:

High income tax in PNG is a disincentive - POST-COURIER