We are living in a paradoxical world characterized by extremes. On the one hand, government is considering the introduction of a minimum wage which becomes a battleground for trade unions and on the other we are discovering the inflation in high salaries of a few in the public sector which raises the eyebrows among many. The same government which increased substantially the old age pension, thus keeping its promise to the electorate prior to the elections, is now contemplating the targeting of old age pensions. We have the high “untouchable” parliamentary pensions and the low mutable old age pensions. The economics of extremes has a definite impact on society at large. It creates a demonstration effect where people feel rightly or wrongly that they have the right to ask for more, just like Oliver Twist.

Inequality

Underlying these instances is the fundamental question of inequality, inequality of income, inequality of opportunity, inequality of wealth. All these emerge from what the British economist John Hicks once said: “Inequality of income is the form taken in our society of a more fundamental Inequality—the Inequality of Power.” He was not wrong. We have pockets of poverty in the midst of plenty.

It is well-known that our income distribution has worsened over time. The Gini coefficient, which is a measure of inequality, had fallen from 0.396 in 1986/87 to 0.371 in 2001/02, but has since been on the upturn reaching 0.413 in 2012, and there are indications that it has aggravated further in recent years. We cannot turn a deaf ear to this issue. It makes no sense talking about alleviating poverty without tackling income inequality. Besides economic growth and job creation, a more equitable income distribution should be a government objective in itself. This has not been on our economic agenda for years, we ask ourselves whether it will find a place in the forthcoming budget.

Income tax: some features

I will here discuss the significance of only one element of fiscal policy which can be used judiciously to curb income inequalities: the individual income tax. A more detailed analysis of income distribution itself could be a subject of another article.

With the fiscal reform of 2007/08, our income tax has become almost a proportional income tax system with a uniform 15 % individual income tax rate. Of course, the deductions represent a higher proportion of income at lower income levels and they do impart a degree of progressivity to our system, but they gradually taper off and become almost insignificant at higher income levels. This is evident from the average tax rates, i.e. tax paid as a share of net income which we have computed for 2006/07 and 2015. Three observations can be drawn therefrom:

1. We notice that the average tax rate has declined sharply for taxpayers whose net income exceeded Rs 1M.
2. It remained almost constant for the Rs 500-750K bracket.
3. It fell slightly for income earners less than Rs 500K.
    

In general, income earners at all levels benefited from the introduction of a standard rate which was coupled with substantial increase in deductions. Lower income taxpayers benefited more from these deductions.

A glance at the distribution of taxpayers and income tax collected reveals:

1. The number of taxpayers has increased by 42 % between 2006/07 and 2015, from 67,167 to 95,331.
2. Income tax payable has risen threefold. On average, taxpayers are paying more than twice they were paying in 2006, Rs 71,508 in 2015 compared to Rs 32,650.
3. In 2006/07, 85 % of taxpayers were in the net income brackets up to Rs500,000. In 2015, this figure has dropped to 40 % as most taxpayers have been scooped into higher brackets given wage compensation, influence of market forces on pay. Salaries for professional and management levels have soared in view of high demand for such competence. Moreover, we have had the operation of fiscal drag since deductions have not kept pace with increases in the price level, earnings or per capita income trends.
4. The bulk of revenue comes from taxpayers earning over Rs 1 million, 52 % in 2006/07 and 68 % in 2015. Taxpayers earning more than 2 M contributed Rs 3 billion to income tax revenue, which is almost 45 % of total individual income tax revenue.
5. Taxpayers earning more than Rs 2 M annually in 2006/07 numbered 847 or 1.26 % of taxpayers whereas the corresponding figure for 2015 was 5132 or 5.38 %.
6. While there were only 156 taxpayers earning over Rs 5 M in 2006/07 the figure has soared to 1312 in 2015.
    

Case for progressivity

While we agree that a low tax rate is a stimulus for greater work effort, higher productivity, investment and growth, we cannot belittle the significance of a progressive tax system, especially at the highest level, as a weapon of distributive justice, especially when salaries are flaring at the highest level. Mr S. Kushiram, former Minister of Financial Services, recently mentioned in l’express that Singapore “is raising its top marginal tax rate and the tax rate for the top 5 % bracket to fund a sharp rise in healthcare spending and provide support to retirees and low earning workers”. India, on its part, has a surcharge of tax for income earners above Rs 500,000 and 15 % for income earners for earners over Rs 10 M. We have a tendency to take Singapore as a model. Even the UK Labour Party in its manifesto mentions: “Only the top 5 percent of earners will be asked to contribute more in tax to help fund public services.” Can we be inspired to learn from them well?

The average annual income for taxpayers in the highest bracket, i.e., above Rs 5 million was 9.25 million. The pertinent question is whether we should still continue with a proportional tax system or impart a degree of progressivity into the system. I must add that inflated salaries are not merely a Mauritian occurrence. It is a worldwide phenomenon. An article in The Economist of 13-19 May stated: “In 1980, the bosses of the 100 biggest listed firms earned 25 times more than a typical employee. In 2016, they earned 130 times more.” However, while the high salaries mentioned in the article are in the domain of the private sector which generates the income justifying such level of salary, in Mauritius, we notice such salaries in the public sector, which depends on public finances.

There is definitely scope for such progressivity which will raise revenue for the government to meet certain expenses, instead of looking for easy solutions which will impact more on the middle class or lower income groups. For example, a five percentage point increase in income tax rate above Rs 2 M will raise at least Rs 1 billion. A doubling of the rate will yield Rs 3 billion. Such a measure would kill two birds with one stone, namely, generate revenue and reduce inequality while obviating the need for more regressive tax increases. If properly utilised, it could provide funds for major projects, maintain some elements of the welfare State, help to alleviate the tax burden at lower income levels and reduce government borrowing for some major projects.

Conclusion

Curbing income inequalities should be a national priority, a social and economic imperative and the income tax system can play its due role effectively. Income tax is not the only weapon available to curb inequalities but it can be a powerful one if used in conjunction with other measures. In this respect, a degree of progressivity will contribute to lessening inequalities. It can generate revenue to finance essential consumption expenditure of government or vital infrastructure and capital projects on which our future economic leap depends. It would also not jeopardize our economic growth. OECD studies have shown that a more equitable income distribution can contribute to economic growth as well.

Mauritius Employers’ Federation

Dr AZAD JEETUN

Former Director

Mauritius Employers’ Federation