Brown’s new tax is flawed and irresponsible

Mark Brown’s new tax on our already struggling population is a gross miscalculation in more ways than one. However, the Minister of Finance has really gone off the rails with a flawed analysis of how to balance a budget, and where that revenue is going to come from. Adding insult to injury, Brown is shrugging his shoulders over the formula or rationale behind arriving at his magic figure of one million dollars in new revenue.
The Democratic Party lays down this challenge for the Minister and his government. We do not believe the Minister has received the right advice. We do not believe the Minister will generate the revenue he is so willing to gamble on with this taxation move. And we do not believe this penalty on an already struggling people should be retained if proven to be as flawed as we say it is.
According to public comments, the Ministry of Finance and Economic Management is basing its revenue estimate on the availability of $221 million held in deposit by the main banks. Furthermore, that this available sum yields around $9.5 million in interest. This is Brown’s target – the interest. At his proposed tax rate of 15%, the $9.5 million would generate $1.5 million over a 12 month period. Since this new tax will not commence until the second quarter, the Minister calculates the government will receive at least $1 million in tax revenues.
However, we argue two points. One, the assumption that the total of $221million in the banks is earning interest is wrong. Two, the assumption that all interest income is tax free is also wrong.
In the absence of sound explanations from the Minister, the Opposition wishes to highlight the following – calculations, which we are prepared to back with analysis of MFEM’s Statistics Division figures for June 2010.
1. Total deposits held by the banks were $221.8 million.
2. $63.5 million of that total was made up of Demand Deposits, and Notes and Coins in Circulation. The vast majority of this money does not earn interest. This amount therefore should be extracted out, leaving a balance of $158.3 million from the original base total of $221.8 million.
3. Of this balance of $158.3 million, near 80 per cent ($126.6 million) is owned by companies and already produces tax of 20%. Therefore, this amount will not produce more money from a withholding tax.
4. This now leaves $31.7 million in individuals’ savings. Based on an interest rate of 4.3% pa, this money will generate a total interest income of $1.4 million.
5. Applying Mark Brown’s 15% Withholding Tax on this amount will generate only $204,207 – a far lower figure than the $1 million in the Minister’s budget.
6. Lastly, this represents a shortfall of $795,793 in the 2011/2012 budget.
Of alarming concern, is that in March 2011, the total deposits held by the banks dropped down to $189.4 million. By utilizing the same analysis, $141 million is companies and individual savings. Only 20 percent ($28.2 million) of that amount represents individual savings and based on the 4.3% interest rate, will generate a total interest income of $1.2 million. Once again, applying the Brown 15% Withholding Tax on this amount will generate only $181,890. This results in an even bigger shortfall of $818,110 in the Minster’s original tax figure.
Whether the Government Statistics office figure of $189 million in the banks is correct is a debatable point. But even using the higher $221 million, the hoped for extra receipts for the government budget are well overstated.
The decline in the total savings from 2010 to 2011 should have been noted by Brown and his financial advisors in MFEM. We contend that the budget presented by Brown may look balanced on paper but on deeper analysis, is both flawed and irresponsible. It should have been withdrawn.
Brown’s new tax and equally flawed budget will have a negative impact on the economy due to the effect on savings and interest rates. That’s bad news – not just for the annual budget – but for businesses and people in general who continue to face crippling interest rates in the banking system. The Democratic Party has consistently supported moves to tackle this problem and just a couple of weeks ago, we encouraged the government to do the right thing and look at increasing the levels of finance credit. We believe that making more money available to the banking system will ease the pressure of imposing high interest rates.
Expensive overseas funds available to Cook Islands’ banks are keeping our interest rates up and more needs to be done to help boost local savings here and retain money in the country. Brown’s new tax will harm the levels of liquidity, drive savings out of the country and discourage others from investing money locally. The net result is the government will help drive up interest rates. How is this helpful to people already struggling and those businesses looking to start-up and help our economy grow?
Of equal concern to the Opposition is the flippant attitude with which the Minister is dealing with this growing can of worms, which will spread through the whole of his government. It was first reported that MFEM had provided the calculations and advice to the Minister. Then the Minister decided to spread blame to the International Monetary Fund for advising the government. Now the Minister is roping in the consultation of the banks to help justify his figures. We know that the finance people only met the Bankers Association on Monday this week and the tax officials were challenged over the IMF and MFEM figures, which were not even provided by the banks themselves.
This scenario raises even more questions about the management of the country’s finances. To begin with, the finance people tried their best to tell Cook Islanders that withholding tax is common in developed countries. I’m sure the struggling people of the Outer Islands will be keen to know they’ve been compared to the likes of the USA, Europe, and Japan. The Minister also, for some unexplained reason, has gone running to the IMF – an organization in which the Cook Islands is not even a member. And now the country’s major banks are being used as cannon fodder to take the blows of unreliable financial figures by the Minister and his team. How long must we be insulted by this financial charade?

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