Joseph M Matalon, chairman of the committee undertaking a review of the country’s tax system, has said that equity and fairness were two of the key components being looked at in the evaluation process.

“A tax system can only be effective if it is perceived by those who are taxed to be a fair system,” he told JIS News in a recent interview.

It was against this background that members of the public were invited to make submissions for reform.

Matalon said the submissions were being analysed by a technical team and would be taken into consideration in the reform package being recommended.

According to Matalon, equity is determined in two ways: vertical and horizontal externalities. Horizontal equity refers to individuals who are on the same income level and are paying approximately the same proportion of their total income in taxes.

“I am not just referring to individual income taxes but to all the taxes, both direct and indirect”, he explained.

Meanwhile, vertical equity looks at the proportion of a person’s earnings that is taxed based on the income level. Therefore, “if as a person’s income rises, a greater proportion of it goes into taxes, this is referred to as a progressive system”. He pointed out that if the percentage of tax paid did not change as income rose, then this was referred to as a proportionate system, and was regressive if the lower income classes were paying a greater percentage of their income in taxes than the higher income classes.

In addition to equity, Matalon said the committee considered the issue of simplicity. “We would want a system that is as simple as possible to administer as it encourages compliance and lowers the cost of administration so that net yield after administrative cost of the tax dollar is higher, allowing government to have a greater proportion of that gross revenue to provide public services.”

The committee chairman said that consideration was also given to the matter of economic efficiency, that is, “does the tax system and the manner in which various taxes are imposed create distortions in the economy, and is it encouraging capital into one particular area to the detriment of others based purely upon the tax structure and not on underlying economic reality?” he asked.

The last comprehensive reform of the tax system took place in the 1980’s with technical support from the Andrew Young School of Policy Studies at Georgia State University in the USA.