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Property tax and the Kobayashi Maru

Published: 
Thursday, May 4, 2017
HDC settlement

The Government is faced with an unenviable situation. The manner in which our expenditure profile has been built up since 2001 to now has seen consistent growth in a number of fixed costs such as wages and salaries. Also growing annually, up to 2015, has been the size of transfers and subsidies.

The transfers and subsidies have been so entrenched in the lifestyle of the average citizen that this has become relatively inflexible even if they are not fixed.

Today, we are faced with a situation where we no longer have the revenues to support various entrenched levels of expenditure nor do we have an expenditure profile that is flexible enough to allow for cuts to be made without significant dislocations.

On the one hand, there is pressure from the rating agencies to make deeper cuts to expenditure.

On the other hand, there is the recognition by the Government that faster and deeper cuts will create significant dislocations within a society already distressed by high crime rates and failures in many basic services.

Failure to make deep cuts to expenditures—especially after we have been budgeting for deficits of around $7 billion every year since 2009—means we are progressively using up our fiscal buffers and our debt levels are increasing at a rapid rate. It’s a challenging dilemma that any party in government would struggle to manage.

 

 

The headline, Kobayashi Maru, comes from a scene in Star Trek II: The Wrath of Khan. It describes an unwinnable event where, regardless of the choice undertaken, the outcome will carry dire consequences. In the movie the star fleet vessel The Kobayashi Maru is trapped in the Klingon Neutral Zone.

Faced with a fellow Star Fleet vessel that was rapidly losing power and life support, the crew of the Enterprise had to decide if to enter the Neutral Zone and attempt to rescue the Kobayashi Maru and risk an attack by the Klingons for violating the Neutral Zone or abandon the friendly vessel and leave the passengers and crew to die.

The crew of the Star Ship Enterprise had to choose between dealing with the emotion of leaving their comrades to die or the consequences of starting a war.

What would you do if you had the choice to make?

T&T is facing a similar seemingly unwinnable event but of an economic kind.

The Kobayashi Maru on Star Trek II was actually a Starfleet training exercise with the aim of test ethical decision-making and leadership. Part of that process is the recognition of the limits of your powers and deciding what to do in the face of those limits.

In T&T’s case, we are not in a training exercise but rather we are faced with two difficult choices: either cut expenditures and see the economy crash or borrow to support expenses today and face the music tomorrow.

In real life, though, when faced with two difficult choices, it is more practical to try to find a third or fourth alternative. The alternatives may not be obvious but they are usually there if we look hard enough.

This is where Property Tax comes into the mix.

Seen as a revenue generating mechanism, it is expected that this tax, along with other measures, can generate revenues that will provide support for expenditures and reduce the need for borrowing.

This sounds reasonable and logical and, in light of the situation just described, one may ask why the public outcry over the imposition of this tax, especially when it was signaled months ago that it would be coming into effect.

 

 

To understand this you have to go to the very core of what a system of taxation in a western democracy is supposed to represent. At its very basic level, our system of taxation is based on voluntary compliance. Sure there are fines and penalties in place but a tax system is much cheaper to administer when compliance is voluntary.

Voluntary implies that people must be willing and, in order to be willing, you need to understand what you are doing and why. Acknowledging this truth is also an acknowledgement by the State of the limits of its power.

The solution to the problem is not based on the arguments of facts but rather dealing with the emotive needs of citizens in terms of the roll out and implementation. That the communication of matters related to the tax is coming long after the announcement of the tax suggests the entire process has many unnecessary gaps.

Yet the impositions of property taxes—or any taxes for that matter—is not groundbreaking and have been dealt with by economists for hundreds of years.

Long considered one of the founding fathers of classical economics Adam Smith in 1776 offered four maxims regarding taxation in general. He suggested that taxes should be fair, should have a level of certainty and more to the point should not be arbitrary and that they “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.”

Finally Smith suggested that taxes “ought to be so contrived as both to take out and to 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.”

Each of these maxims has an emotive connotation for the property taxpayer, a perspective that is yet to be addressed in any tangible way and seems unlikely given the talking points to date. There is also logic to these maxims that, if applied to the current situation, pushes a number of the arguments for implementation in its current form to the side.

Smith has dealt with even the manner in which we have sought to request documents from the taxpayer in his writings many years ago. He said that ‘the odious examination of the tax gatherers’ may cause taxpayers much unnecessary trouble, vexation and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it.”

Yet not only our approach to the property tax issue seems misguided but the very essence of what property tax is supposed to represent can be called into question in terms of the way this tax is being implemented. We have tied the property tax to local government reform and the implication is that, at some stage in the future, the tax would allow for the regional corporations to have the resources to provide localised services such as garbage collection and the like.

The problem here is that if a property tax is based on the valuation of your property, then if we understand the rationale of what has been put forward by Adam Smith, the tax itself should ultimately lead to services that will render to the maintenance or even the appreciation in value of the property by the property owner. That is the basis for which you will find voluntary compliance and reduce the cost of compliance.

Without that nexus we are dealing with a level of arbitrariness that is not in keeping with managing the cost of compliance. If done properly, property taxes might be the tax that leads to the best level of compliance of all taxes. We are a long way away from that position now.

If it is that the system will over time allow for the redistribution of property taxes collected from one area to another, then the element of redistribution in and of itself may not be in keeping with the nexus that is supposed to result from the property tax. Appreciate that this is a tax on your balance sheet that is paid out of income via your cash flows. It is not a “normal tax.”

There are other forms of taxation to cater to redistribution.

If redistribution from one area to another is part of the equation then raise income or corporation taxes to meet that objective. Don’t conflate the issues.

The lesson behind the Kobayashi Maru is the exploration of alternatives.

Clearly one stand-out alternative is the introduction of taxes on gaming and betting as a revenue generating substitute. This tax, also promised in 2009, has been on the cards since 2013. It has been signalled in the most recent budget and deals with a sector that, in many instances, operates outside the law. It is quite likely we would also raise around $500 million from this tax.

Further, the cost of compliance will bring about a social good which implies additional benefits and is net a greater positive.

Another alternative is the promise of improved VAT collection as indicated in the 2016 budget.

Do we still have leakage here?

Is this a lower hanging revenue generating fruit?

Appreciate that the key to wining the unwinnable event is to explore and find various alternatives.

I am not opposed to a tax. I am simply questioning its conceptualisation and implementation.

Is it time for a rethink?

Ian Narine can be contacted via email at ian.narine@gmail.com