Four Reasons Top Taxes Are Too Low

One is obviously the low growth rates that Mauritius has clipped for the past few years: indeed 2015 is looking to be the 5th consecutive year that it will be under 4%. I don't think this has ever happened. At least not since independence. I am sure you remember that one bean-counter promised Bretton Woods-inspired robust average growth of 8% back in 2005. Which was the reason the tax structure was flattened.

Two is that tax receipts have literally stayed flat in real terms over the last 12 months. Indeed the MRA disclosed that it collected only 4% more in the last fiscal year. Which roughly matches the increase in the general level of prices. We've alluded to that before.

Three the MCCI said that more than a third of the businesses it surveyed recently are complaining that Government is not doing enough to improve their businesses. Well, with the silly flat tax Government has ensured that it would have less resources -- and the private sector would have more -- to drive the economy. If nothing much has happened and is going to happen Government should raise top taxes to move Mauritius forward. If we don't want to keep on waiting for Godot.

Finally the flat tax has increased inequality tremendously. You just need to compare the number of people thrown into poverty after Navin Ramgoolam's first and second mandate. We can also have a look at how real disposable income has changed for the richest and poorest 10% of our households for the same periods. That's pretty bad for our social fabric and for better economic growth.

There is of course another reason why top taxes should increase.

15% Flat Tax is Enemy of Good Growth

Bean-counters' answer to their own manufactured lie was a promise of robust growth rates if we reduced taxes by 50%. That -- as expected -- didn't happen. They said well it's because of the financial crisis. Not really, the mess we're in was hatched in Mauritius: our economy didn't rebound in 2010 when the rest of the world did. Besides 57 countries had better growth rates than us in the first three years of the reforms -- which include, by the way, the years of 'early harvest' and 'bumper crop'.

But government has collected more revenue they say. Its revenue can increase if you have higher growth rates, better collections or if you are ripping us off with unreal prices. There has been better collections -- this can happen irrespective of tax rates -- but they did not make up for the shortfall caused by the string of ridiculously low growth rates of the reform vintage. Which is in any case what the PBB circulars have been telling us year after year. One is mostly a one-off thing, the other a cancer that spreads rapidly. You can find that out by recomputing the revenue government collected minus the stupid things (hedging billions, abusive energy prices, making SMS more expensive, high internet prices, wider-than-necessary interest rate spreads, etc). And have a look at the servicing of our debt and its structure for some additional clues that we need to add a couple of higher tax brackets on budget day. Having a good look at recent shutdowns of the US government is also not a bad idea.

And if unemployment has stayed stuck above 10% since the reforms began is it because our people don't have any good skills or is it because there are too many poverty-pay jobs on offer? And because the floodgates of stupidity have been opened? And no, we cannot increase productivity forever in one activity. We need to do other stuff. And use a range of tax rates to make intelligent bets.

Finally if our trade relationship with the rest of the world is unbalanced is it because we're not exporting enough or because we are importing things that we don't really need?

So, How Big is The Toohrooh?

We know from our previous conversation that it's in the billions. But how good an estimate can you come up with? And how quickly?

I am starting my stopwatch now.

How Bad Economics Made Mauritius A Sad Place

Cutting top tax rates by 50% required that the economy grow, on average, at a robust rate: 8% instead of the usual 5%. Maybe a bit less if you got slightly better collections from the MRA and reduced wastage levels. But as the above graphic shows the economy never grew close to where it should have to justify the flat tax. Which would explain why fiscal policy literally became a game of Nintendo and decisions that would have improved our competitiveness and your living conditions took a backseat for several years.

The multi-billion rupee revenue shortfall was financed with a pile of debt too much of which was denominated in foreign currency. Making us more vulnerable. Bean-counters are now likely to ask that the State sell several of its assets which would drastically narrow the opportunities of the many while expanding those of the few. This of course is not the Labour Party's idea of the State.