Principles of Taxation and PNG’s Tax Review 2013-2015

Gomi J Gipe, Applied Economics, Department of Business Studies, University of Technology, Lae

11th April 2014

Section 1 Purpose First, the paper summarizes the core principles of taxation seen from perspectives of a modern developing capitalist economy.

Second, it immediately briefly links the principles, with particular reference to the problems and challenges of economic development in PNG in the 21st century, in light of her Tax Review 2013 to 2015.

Third, the paper then makes important proposals for dramatic changes to the status quo with a 100 years Vision in mind. The Vision is very simple--that by 20114 PNG would be enjoying the status of a Developed Economies are today. But by then much in the world would have changed. For example. China could be the next world superpower. One writes from theoretical perspective as an academic economist, who has been teaching Public Finance for several years in a University with taxation as an important component. Sources are identified and acknowledged in the text and References that are used are shown towards the end of the paper.

Section 2 Definition & Rationale Definition The term ‘Tax’ is defined as a compulsory payment made by people and corporations to a state authority for purpose of provision of public goods and services. In PNG most members of formal labor force and firms pay one form of tax or another. Rationale Generally, rationale of tax comes from experiences of past human history where kings and warlords collected taxes. A number of rationale for imposition of taxation by a modern state are listed; Raise money for security and defense needs of citizens and others; Share burdens of provision of most public goods and services; Share cost of common-pool and toll goods; Re-distribute wealth in an economy; A tool of micro- or macroeconomic policy. (Source: Ideas about ‘Rationale’ are adopted and applied from internet sources, accessed 2012)

Section 3 Taxation & Government Policy Usually a government state imposes and collects taxes. In PNG, the government through the state (the IPA) may perceive a tax as a policy tool for purpose of economic policy management. Some examples of tax policy may include but not limited to;

1. Raise Revenue – to finance most government expenditure 2. Discourage - consumption, such as certain (demerit) goods 3. Redistribute Income – such as from the rich to the poor 4. Manage Aggregate Demand – Macroeconomic stabilization 5. May be undesirable to raise revenue in other ways, e.g. More borrowing is expensive. (Source: Ideas about ‘Taxation and government policy’ are adopted and applied from internet sources, accessed 2012)

Section 4 What is a ‘Good Tax’? From writings of the Classical Economists and others a ‘Good Tax’ is usually defined as a tax or tax system that fulfills at least four principles;

Certainty: In theory tax rates should be clear and known to the tax payer. Collectability: Also in theory taxes should be relatively cheap to collect. Convenience: Further, in theory, taxes should be levied at a time when it is convenient for the taxpayer to raise the revenue. Equity (fairness): Finally in theory taxes should be levied according to peoples ability to pay. These principles are emphasized and applied for PNG in the next few sections. (Source: Ideas about ‘Good tax’ are adopted and applied from internet sources, accessed 2012)

Section 5 Certainty We may ask. Are the tax rates clear and known to the tax payers in PNG? It

depends on what we mean by ‘clear’ and ‘known’. By the term ‘clear’ we mean that the rates and methods of collection are relatively simple for a tax payer with ‘an acceptable minimum level of education’. At this stage of PNG’s development ‘an acceptable minimum level of education’ level is deemed to be grade 12. Since 2000 the Internal Revenue Commission (IRC) has tried to ensure information about system and tax rates are made clear and made known to many tax payers in PNG.

However there are a lot of room for improvement. From our observation many Small to Medium Enterprises, especially those in the rural or village areas, normally do not have access to relevant information about taxes in PNG. There need to be improvement made to ensure that information is accessible to all tax payers. Education level in rural or village areas may be lower than grade 12, which may create difficulties which must be seen as a challenge by the IRC.

It is proposed that the IRC should develop website that provide information in simple format and simple language, so that the major the Small and Medium enterprises can access them. The IRC has already made a headway. For example. The IRC has introduced payment of taxation by electronics. This is a step in the right direction for PNG. We have more to say about this matter (See Section 8).

(Source: Ideas about ‘Certainty’ are adopted and applied from internet sources, accessed 2012)

Section 6 Collectability Are the present taxes relatively cheap to collect? It depends on what is meant ‘cheap to

collect’. By the term ‘cheap to collect’ we mean viability of a ‘tax collection economy’ in PNG. That is, we specifically mean, the marginal cost of collection should be made equal to the marginal tax revenue collected.

PNG government’s resources that are used to collect taxes are deemed to be ‘costs’ in themselves.

Economic efficiency in tax collection requires minimization of costs and maximization of amounts of tax revenue collected.

There is usually a trade-off between equity and collectability. As long as distribution according to benefits is equal to costs of collectivity, PNG will gain.

In PNG the IRC’s costs of tax collection administration should be lower than the tax revenue collected, otherwise it is not economically viable. One way of indirectly enhance this principle is to develop appropriate software and websites and conduct collectivity via the Internet in the 21st century. The software would enable IRC to operate efficiently in the domain of Marginal Cost (MC) and Marginal benefit (MB).

Thus one proposes that PNG’s IRC needs to be modernized by at least 100 times its present level. (See Section 7 on the Microeconomics of IRC’s Tax Collection Machinery).

(Source: Ideas about ‘Collectability’’ are adopted and applied from internet sources, accessed 2012)

Section 7 Microeconomics & Tax Administration PNG faces core Microeconomic problems with respect to IRC’s tax collection machinery. In the current Tax Review, Microeconomic principles should be very carefully considered in every aspect of the IRC’s tax collection machinery. Let us briefly Review the core Microeconomics of IRC Tax Collection machinery. - Choices: What, How and for Whom does the IRC collect taxes? These questions imply that the

IRC tax administration machinery should never justify its own existence. For a simple reason—Most resources under heaven are scares! Except perhaps Oxygen we breathe and others like oxygen!

- Therefore we aske, What are the Opportunity Cost of scares resources that are being diverted annually by PNG Government through the IRC to collect taxes? Are the amounts diverted economically justified? Have economic reviews been carried out on IRC’s tax collection machinery? Or is it a ‘runaway machinery’ that gobbles up scares resources that should have been used elsewhere in the PNG economy to benefit PNG people?

- In one’s view the IRC’s Microeconomic decision making should be based on; • Marginal costs and Marginal benefits of Tax collection machinery. That is to say: • If the MC < MB → Then go ahead and collect taxes using the existing IRC

administration machinery • But if MC > MB → Then collect less taxes using existing IRC administration

machinery , and/or divert resources to other more beneficial areas in PNG.

• The Microeconomic objectives of PNG and IRC tax collection machinery should be; • Economic efficiency • Economic equity (Source: G J Gipe, Applied from Introduction to Economics, Applied Economics, PNG University of Technology, 2013)

Section 8 Convenience (Two Development-Tracking Taxation Software )

In PNG taxes should be convenient. By this term we mean that taxes should be levied at a time when it is convenient for the taxpayer, and there should be established two objectively verifiable national SOFTWARE systems for 21st century. The Central goal is to serve the majority of the PNG people under the National Constitution.

In PNG, the National government normally targets November session of National Parliament each year as the normal time frame for a budget process, in which, eventually, a Supply Bill is passed, before the House takes a recess.

Before the November session of National Parliament, the state starts a process in which the national accounts (which had been closed for a recess) are normally opened. Then relevant state instrumentalities, begin the budget process for a new year. In this process the IRC has its own sub-process.

This is our critique. Uncritical acceptance of other countries budget processes (Especially Australia and United Kingdom), have left PNG in difficult and sometimes precarious situations. In some cumbersome situations, usually the “Left-Hand-Side” does not know what the “Right-Hand-Side” is doing, in the whole State beaurecracy. There exist some co-ordination about taxation matters, which are cumbersome, inadequate, and inefficient limited.

In the context of Tax Review PNG should Review and budget process (Revenue and Expenditure) and be linked to a first software to be known as “STANDARD REVENUE AND EXPENDITURE TRACKING SOFTWARE” (SRAETS). In theory SRETS would link-up all relevant Revenue or tax-generating entities,. The Volume and Price of each tax source would be planned ahead in the software. In principle on the Revenue-Tax-Side we might include the IRC, tax-paying statutory corporations, and other tax-paying organizations including the private sector and the businesses. Also in theory SRETS would link-up all relevant Expenditure entities. The Volume and price of major expenditure centers would also be planned ahead. On the Expenditure-Side the core premise is stated. We would fully implement the Five Goals and Directive Principles shown in the National Constitution of PNG, and not play lip-service for another 40 years while PNG people suffer The selection of entities for inclusion in expenditure-side should be driven by three criterion only (a) Proven Productive Efficiency (PPE1) (b) Prove Performance Effectiveness (PPE2) (c ) Proven Record of Financial Audit (PROFA). Use of three principles would imply that we would select “Very efficient, very effective and Accountable, audit-wise entities and PNG people living in Rural Areas and Village areas COULD NOT LIVE WITHOUT! Examples of our selection may be illustrated (1) (Treasury and Finance (as one unit, one for policy another for disbursements of funds) (2) Foreign Affairs & Trade (3) Defense (4) Health (with Provincial Hospital Board being strengthened) (5 ) Education (with Teaching Services Commission being abolished and its roles built into Education Divisions in the 22 Provinces) (6) Prime Minister and NEC (7) A Co-ordinating Authority for District and Local Level Government Councils. In this manner we would do away with the monster we now call the Department of Personal Management (8) Relevant Money-making statutory organizations (9) Provincial and District Administration Departments.

Other Department and statutory organizations in PNG which are not included would face only three options (a) If they fulfill the three criterion, they would be amalgamated into relevant Departments (b) Be forced to fulfill the three criterion before they are considered for selection (c ) Be abolished and never be re-established.

For Example. The present Australian National University-National Research Institute annual Budget Tacking activity is one smaller and narrower project to what is meant in this section. In summary on the Revenue-Side PNG needs a Tracking software which in turn is backed up by powerful software.

In the context of the Tax Review PNG should also Review a wider economic developmental Impact of the Budget *Revenue-Expenditure) a second software to be known as “DEVELOPMENT, INEQUALITY AND POVERTY TRACKING SOFTWARE” (DIAPTS). The Relevance of the second Software is apparent when we ask this cutting question: What is the real point in the IRC raising Billions of Kina worth of tax and other Revenue, and the Government Expending Billions of Kina every year, when all we get is, a few people getting extremely rich beyond their wildest dreams, indicated by the Lorenz curve, while the majority of PNG (2/3 of the population), are falling into poverty, contrary to the expectations of the 5 goals and directive principles of the national constitution?”

In summary of the section. Outcomes of convenience to all tax-payers are obvious (1) Tax payers would know how the annual Revenue is systematically being linked to the annual Expenditures. Waste and inefficiency would be reduced dramatically. Tax-payers would be satisfied. (2) More importantly, all tax payers would be able to perceive impacts of economic development from their taxes (3) Impacts of Government Budget are tracked (4) Revenues are clearly linked to Expenditures and tax-payers can comment whether expenditures are relevant to National Development as per National Constitution (5) Expenditures are clearly linked to relevant areas of economic development. (6) Knowing these outcomes , the first software would prompt all legally registered tax-payers about the amount and due dates of owed taxes, electronically, in real time. They would believe that their tax money is well-spent

(Source: Ideas about ‘Convenience’ are adopted and applied from internet sources, accessed 2012)

Section 9 Equity What does this term Equity, mean? By the term ‘Equity’ we means that tax should be imposed based on who benefits; and on the basis of ability to pay. In PNG tax regimes should be tailored or crafted on the basis of the principle of Equity. However distribution according to benefits may not be practical for public goods in PNG; where preferences are not revealed. One reason is the issues of tax incident and who benefits are difficult to assess and employ given the social structure and lack of baseline statistical data in PNG. For a small start in PNG, in general “ability to pay” may be measured according to a number of existing basis. These may include, but not limited to; Property Owned: Who own property? In PNG most reasonable sized property owners are a few foreigners.PNG

may regard them as being rich and the temptation is to tax them. Also there is no or little evidence of a PNG middle class with property to be taxed.

Income Earned: Who earns income in PNG? It seems mainly taxpayers in a small modern, usually urban-based activities, which pay regular formal wages or salaries which could be taxed. The majority of PNG people are yet to be brought into the formal or modern sector, in which tax could be applied. Enlargement of tax-base will huge economic ramifications. Growth of tax base can happen when the government brings in the 97% of the Customary-owned Lands into the formal Economy. One would like to put this proposal forward as a challenge for the next 100 years for PNG.

Net Wealth Gained: PNG cannot discuss tax on Net Wealth Gained until she formally and quickly addresses twin problems of economic growth. First, an estimated 33% of PNG people may be living in economic poverty. (Cammack D, Chronic Poverty in PNG, D.Cammack@odi.org.uk). Second, PNG also needs to addresses an equally important challenge: the rising spatial and personal income inequality in PNG (Gipe G, Long-term Changes of income inequality: Theory, Evidence and explanation, Wollongong, 1995).

After all a tax is never imposed in a vacuum—Tax is imposed to help the human being! More seriously the 5 goals and directive principles about economic equity are supposed to guides PNG’s future development, including changes in taxation policy. Of course, unless somehow, PNG has been playing ‘lip services’ existence of the 5 goals and directive principles of the National Constitution.

(Source: Ideas about ‘Equity’ are adopted and applied from internet sources, accessed 2012)

Horizontal Equity Horizontal Equity refers to people who have the same ability to pay ought to pay equal amount of tax. In PNG the GST may infringe on this principle. Regardless of the ability to pay, the GST catches everyone at the till of every shop in PNG. In a country where economic poverty is said to be rising GST hurts people at the lower rung of PNG society. Thus a poor unemployed father, from Bumbu Compound in Lae or a fatherless youth seeking work after University education, is required to pay the same GST. How very unfair and very damming and very heartless can PNG become especially when she claims to be a Christian country?

Vertical Equity Vertical Equity refers to proper relationship between tax burdens of individuals with different capabilities to pay. Thus employees in a same firm in PNG may be taxed given their different ability to pay. Hence Horizontal and Vertical equity issues may impinge on re-distribution issues in PNG as follows; Regressive: The idea is as peoples’ income rise, people pay less tax rate (See table 1). Is it fair and just? Unless PNG carefully tracks earning power and rates of earning , say using a software, it can be difficult to establish sound rational basis for this tax. Proportional: The idea is as peoples’ income rise, people pay the same tax rate (See table 1). Is this fair or just? Economically, this may cause disincentive to entrepreneurship. Also it sounds reasonable, but difficult to implement or manage unless PNG has statistical data because private people may conceal their income or wealth in some dubious ways. Progressive: The idea is, as peoples’ income raise, peoples’ income tax rise correspondingly.(See table 1) Is this fair and just? There are economic arguments for and against the three tax systems. That is why we kept asking this question: Is it fair and just?

(Source: Ideas about ‘Types of equity’ are adopted and applied from internet sources, accessed 2012)

Section 10 Types of Equity

Section 11 Transparency What do we mean by ‘transparency? With respect to taxation, by ‘transparency’ we mean a tax payer knowing all information surrounding a tax before paying it. To be effective a tax system in PNG needs to be transparent. More specifically we mean sound application of at least four administrative principles in PNG; Adoption: PNG’s taxes need to be adopted by legitimate processes, in repetitive,

receptive and proactive manners. Otherwise it would be taxation by illegitimacy! Administration: In PNG tax collection criteria needs to be objective, explicit, knowable,

and fair to everyone. Otherwise it would be taxation ambush! Compliance requirements: How tax is to be calculated need to be made crystal clear to

all tax payers in PNG. Otherwise it would be taxation by ignorance! Amount of payment: Taxpayers in PNG need to know how much tax they are paying

and to whom they are paying it. Otherwise it would be ‘blind’ taxation by irrelevance! In this context the present tax system need to be completely (100%) overhauled to accommodate these ideals. Much of the overhaul will be by way reviewing the exiting processes and procedures of taxation. Also in the review the manners in which information are disseminated to the tax payers would be streamlined and dramatically upgraded. Use of computer software, website and the ordinary Mobile phones should be adopted as new forms of medium of technology, to enhance and support implementation of a Transparency tax system in PNG.

(Source: Ideas about ‘Transparency’ are adopted and applied from internet sources, accessed 2012)

By ‘Stability’ of tax system we are referring to a country’s ability to ensure that tax bases are planned in advanced to ensure that the expected tax revenue is raised consistent with growth in demand for goods and services in a projected period of time. Cyclical stability of tax base PNG needs to diversify tax bases in some of these areas; 1. Personal income taxes: The personal income tax rates and bases need to be changed in future. In in PNG could be done through

application of both supply-side economics and demand-side economics. In the supply- side economics PNG could find ways to bring more customary-owned lands into modern economic production process. In the long-run this process would also help reduce the real estate costs and prices in urban areas and make housing affordable in urban areas. Meanwhile Personal income tax rates for certain classes of people should be reduced. At present people earning K10, 000 are not required to pay income taxes. The threshold should be increased further to K20,000.00. On the n demand-side PNG could encourage some demand-driven goods and services.

2. Property taxes: Subject to proposed changes in In tem 1 (Personal Income Tax) occurring, tax bases for property would be enlarged.

3. General sales or value added taxes: In PNG Value-Added Tax needs to be reviewed with an aim to generally opening up and broadening the sales and excise taxes in PNG. In theory we are proposing distributional arguments for progressive rates of commodity taxation. Thus class-differentiated consumption patterns may conform to implicit assumptions of a country imposing progressive indirect taxes, where some goods may be better indices of tax-paying abilities than other goods; as Bird suggested for Colombia (Bird RM, 1964: 313) For example. Taxing luxury goods and not basic goods of the poorer people.

4. Excises: In a review of taxation of consumption expenditure with reference to India Chelliah suggested a taxation of a wide range of articles, excise tax being prominent (Chelliah R J, 1964: 23). PNG would expand its tax base in some areas.

5. Corporate profit taxes: PNG needs to review corporate profits tax with an aim of reducing them for some but not all entities which have proven records of re-investing certain proportion (say 51%) of their profits in the PNG economy.

6. Revenue (adequacy) stability: Economic growth = growth in demand for services. PNG needs to identify revenue sources that also expand (or contract) with income. These need to be tracked with computer software and incorporated into PNG’s National Planning parameters.

(Source: Ideas about ‘Stability’ are adopted and applied from internet sources, accessed 2012)

Section 12 Stability

Section 13 Categories of Taxes Taxes can be categorized as one of the following; Direct – In PNG these are the taxes that are levied directly on incomes and wealth.

Examples include some of the following; income tax and corporate tax. In general direct taxes (income and corporate taxes) in PNG need to be imposed every time a new tax payer come on line. In practice it does not work well in PNG, because many conditions for successful use do not exist easily. Goode R (1964) lists some of them (a) Existence of predominantly money economy (b) High standard of literacy (c ) Prevalence of honesty and reliability in maintaining accounting records (d) Voluntary compliance on the part of tax-payers (e) Political condition of development of income and corporate taxes (f) Honest and efficient tax administration.

Indirect – In PNG these are taxes that are levied when expenditures take place. Examples include; customs and excise taxes (See further theory on tax incident below) . In PNG indirect taxes need to be imposed on expenditures as they come on stream. However in practice it does not work well in PNG, because many conditions for successful use do not exist easily. Some of them are shown (a) corporations are formally registered with the IPA as a business and formally register a tax file; as they would remit the indirect taxes to the IRC (b) Corporations keep proper preferably computerized files and records (c ) Schedule of tax remittance (d) Whether IRC checks remittance for compliance throughout a period, say one year.

(Source: Ideas about ‘Category of taxes’ are adopted and applied from internet sources, accessed 2012)

Section 14 Indirect Taxes In PNG understanding and administration of indirect taxes need to improve. They are indirect because consumers end up paying them indirectly by spending

income on goods & services. An example is the GST. Usually these taxes are contained in the final prices of goods and services. They are is cheap to collect and ‘lacks announcement effect’. However this ‘understanding’ needs to change. Indirect tax tend to create ‘taxation

double-jeopardy’ . By this concept we mean to say that because they are indirect people and entities that are paying other forms of taxes may be also paying the indirect taxes. For example. People who are paying income or corporation taxes may also be paying the indirect taxes. The practice tend to breach some principles of ‘good tax’. For example. Two PNG Nationals (one a poorer person earning K12, 000 per year and a richer one earning K500, 000 per year) may be paying indirect taxes (such as GST). Whilst the poorer person is burdened by it, the richer person hardly notices the indirect taxes. For this reason there need to be ways to distinguish (a) Type of expenditures and (b) Different tax-payers in order to i\introduce more fairer taxes in PNG.

Administration. Subject to Section 8, tax administration in PNG need to be improved drastically and broadened to include performance indicators. It is our view that one way to introduce the improvement is through development of specific tax administration software.

(Source: Ideas about ‘Indirect taxes’ are adopted and applied from internet sources, accessed 2012)

Section 15 Types of Indirect Taxes Subject to Section 13, in PNG before indirect taxes could be imposed pre-conditions need to be improved. Also there are the two types of Indirect Taxes indiscrimately considering principles of ‘Good tax’ and need to be Reviewed. (a) Advalorem – the amount of tax is a % of the value of the good or service bought, e.g. GST (VAT). For example. When a meat pie in Lae costs a person K10.00 and the GST is 10%, then the tax amount is K1.00. For a person from Lae Bumbu compound who has not eat his last three meals and is very hungry and he has the last K10.00, the tax is a very heavy burden for him. Thus Advalorem tax doe not discriminate at least 5 issues (a) the social status of the person paying for the pie (b) the level of income the person has at the time of the purchase (c ) the state of the person, whether he is rich or poor (especially whether he is hungry or filled) (d) Quality of the item being purchased (e ) Where (location) the item is being purchased. (b) Specific (unit) – the amount of tax is a set sum of money per unit of the good service bought, e.g. K0.12 per liter of wine imported from Australia. The Advalorem tax is preferable over specific tax as it keeps pace with inflation. (Source: Ideas about ‘Types of Indirect taxes’ are adopted and applied from internet sources, accessed 2012)

Section 16 Direct Taxes Subject to Section 13, the Tax Review in PNG should

generally agree that before she could impose direct taxes she needs to improve pre-conditions. Direct taxes are levied on persons earning income, e.g. personal income tax, corporate income tax

In PNG taxes can also be levied on possession of wealth, e.g. wealth tax and property taxes. There is a small growing middle class in who could be taxed for their growing wealth. Also in PNG there is also a higher class of richer people who should be taxed more for their wealth

(Source: Ideas about ‘Types of direct taxes’ are adopted and applied from internet sources, accessed 2012)

Section 17 Types of Direct Taxes PNG needs to consider and carefully review the current tax rates based on the three indirect tax system (carefully study Table 1). It really depends on where PNG wants to go and what she wants to do with taxes to get her there. In this context three types of Indirect Taxes are briefly reviewed. (a)Proportional tax – As incomes rise for Papua New Guineans through LNG and other projects the tax rate remain the same. That is the proportion (%) of income going into tax remains the same at all levels of Income. For example. In Hong Kong there is fixed income tax. (b) Progressive tax – As incomes rise for Papua New Guineans through the LNG and other projects the tax rate falls. That is the proportion of income going into tax rises as income rises, e.g. PNG’s income tax. - This may tend to comply with equity, justice & fairness principles. (c )Regressive tax – As incomes rise for Papua New Guineans through LNG and other projects, the proportion of income going into tax falls as income rises. For example. Canada’s corporate income tax. - encourages foreign investment (Source: Ideas about ‘Types of direct taxes’ are adopted and applied from internet sources, accessed 2012)

TABLE 1

THREE TAX SYSTEMS (IN KINA)

Proportional tax Regressive Tax Progressive Tax

Income Amount Percent of Amount of Perecent of Amount of Perecent of

level of tax Income Tax Income Tax Income

1,000 300 30% 500 50% 150 15%

10,000 3,000 30% 3,000 30% 3,000 30%

50,000 15,000 30% 7,500 15% 25,000 50%

Source: G J Gipe, PNG Tax review, 2013 to 2015

Section 18 Is there an economic justification for a Progressive tax structure?

We may consider this economic question in PNG context: Does ‘diminishing marginal utility’ argument hold water for PNG, when there is a social support structure called the ‘Wantok’ System, if ‘Wantok system still exists in 21st century? The economic argument says that materially poorer individuals value additional unit income relatively more than high-income individuals. From our observations, the answer is ‘Yes’. The so- called ‘Wantok’ system started its disintegration path soon after independence in 1975, as greed and/or selfishness began to take hold of the human heart in PNG. Bible prophecy of St Paul says so (II Timothy 3: 1- 5). If it is true that under the National constitution PNG claims to be a Christian country; shouldn’t she not use Bible principles as in II Timothy 3: 1-5? Since selfishness and greed have been rising, the ‘Wantok’ system is no longer viable social security, as in the past. This implies that many millions of PNG people are now being trapped in economic poverty. For such people diminishing marginal utility is a reality! Therefore it would be morally or ethically wrong to disadvantage such people through taxes or tax system that are not thought through carefully. Taxes tends to increase overall societal welfare in at least two ways; First generally through the Keynesian Income Multiplier,; Secondly specifically through projects that help creation two types of impacts (a) Income generation and employment generation in the PNG economy. (Source: Ideas about ‘ Is there an economic justification for a Progressive tax structure?’ are adopted and applied from internet sources, accessed 2012)

Section 19 Who really pays? (Tax incidence) PNG should consider additional economics of tax incident in the Tax Review before

making changes that could affect her people.

The incidence of tax refers to who bears the real or effective burden of the tax. With direct taxes, the income earner bears the impact of the tax burden, it cannot be

shifted to others, e.g. income tax With indirect taxes, the tax burden is shifted to the final consumers of goods and

services, e.g. GST. The following 5 slides show a summary of the economic entities that would bear the

tax burdens. It really depends on the price elasticity of supply and demand. Generally speaking for goods that Inelastic demand consumers bear the tax burden. For

goods that have elastic demand producers bear the tax burden. Also generally speaking for goods that have Inelastic supply producers bear the tax

burdens. For goods that have elastic supply consumers bear the tax burdens. Carefully study the 5 slides about tax incidents. (Source: Ideas about ‘Who really pays?’ (Tax incident) are adopted and applied from internet sources, accessed 2012 and John Sloman, Economics, 2006)

S + tax

S

O

P1

P2

Q2 Q1

D

CONSUMERS’ SHARE

P2 - t PRODUCERS’ SHARE

P

Q

Incidence of tax: Inelastic demand (Example: beer, food)

Consumers pay more tax

Source: G J Gipe BA 161 Lecture Notes University of Technology, 2012

S + tax

S

O

P2 - t

P1

P2

Q2 Q1

D

CONSUMERS’ SHARE

PRODUCERS’ SHARE

P

Q

Incidence of tax: Elastic demand (Example. Newspapers)

Producers pay more tax

Source: G J Gipe BA 161 Lecture Notes University of Technology, 2012

S + tax

S

O

P2 - t

P1

P2

Q2 Q1

D

P

Q

CONSUMERS’ SHARE

PRODUCERS’ SHARE

Incidence of tax: Inelastic supply (Food, beer)

Producers pay more tax

Source: G J Gipe BA 161 Lecture Notes University of Technology, 2012

S + tax P

Q O

P2 - t

P1

P2

Q2 Q1

D

S CONSUMERS’

SHARE

PRODUCERS’ SHARE

Incidence of tax: Elastic supply (Newspapers)

Consumer pays the tax

Source: G J Gipe BA 161 Lecture Notes University of Technology, 2012

Summary: Incidence of tax and elasticity of demand and supply

S + tax

S

O

P2 - t

P1

P2

Q2 Q1

D

P

Q

CONSUMERS’ SHARECONSUMERS’ SHARECONSUMERS’ SHARE

PRODUCERS’ SHAREPRODUCERS’ SHAREPRODUCERS’ SHARE

S + tax

S

O

P2 - t

P1

P2

Q2 Q1

D

CONSUMERS’SHARE

CONSUMERS’CONSUMERS’SHARESHARE

PRODUCERS’ SHARE

PRODUCERS’PRODUCERS’ SHARE SHARE

P

Q

S + tax

S

O

P2 - t P1

P2

Q2 Q1

D

CONSUMERS’SHARE

CONSUMERS’CONSUMERS’SHARESHARE

PRODUCERS’ SHAREPRODUCERS’ SHAREPRODUCERS’ SHARE

P

Q

S + taxP

Q O

P2 - t

P1

P2

Q2 Q1

D

SCONSUMERS’

SHARECONSUMERS’CONSUMERS’

SHARESHARE

PRODUCERS’ SHARE

PRODUCERS’PRODUCERS’ SHARE SHARE

(1) INELASTIC DEMAND

(3) INELASTIC

SUPPLY

(2) ELASTIC DEMAND

(4) ELASTIC SUPPLY

Source: G J Gipe BA 161 Lecture Notes University of Technology, 2012

Section 20 Variation of Tax Incidence In PNG the economics of tax incidents have different variations. The variations are shown. Taxpayer may be able to shift some or all of the cost of a tax to someone else. They may not be taxes at all—but unsolicited financial burdens for tax payers. Forward Shift: Shift to Consumers—Increase Prices! For example. When the through PNG power the government

increases the power tariff without corresponding delivery of electricity to businesses and households, then indirectly the PNG government is ‘taxing’ the tax payers without a reasonable economic reason. In this case the tax payers are hurt at two levels (a) First undue increase in electricity tariff tends to reduce tax payers budget that was allocated to paying electricity (b) Second the fact that electricity supply is already at mediocre level, living standards of tax payers falls by the amount of increase in tariff. One proposes that roles of PNG power should be shift from electricity supply to policy making and private sector be encouraged to use PNG power grid to supply power at competitive rates. Use should be made of alternative sources of energy. In one’s Natural Resource/Environment economics classes at Unitech some of the following energy sources were identified: solar energy, wind energy, tidal energy, hydro energy, gas-generated energy, thermal energy as in New Ireland Province. It appears from sources such as National Geographic, that many countries and/or modern firms are already latching onto and making new discoveries and/or developments some of these alternative energy sources while PNG Power seems to be being left behind in real sense. Another example where Urban Public Motor vehicle owners are practicing and financially hurting many thousands of children and parents is over-charging PMV fares; or dropping off passengers at unwanted destinations that are not legally scheduled for PMVs by transport authorities. The state is weak in these areas, and so PNG power or PMVs get away with it!

Backward Shift: Shift to Suppliers—Reduce Prices paid to them! A prices are set legally and then reduced later, then indirectly the tax payers who are supplying the goods or services are being ‘taxed’. For example. When firms have won a tender, and given various reasons the tender prices for jobs may be reduced, then suppliers are forced to pay many hidden costs. The suppliers which are also tax payers may be financially hurt by the bad habits of the state. Once again, the state is weak in these areas, and so the practioners get away with it.

Absorption: Absorb tax—lower return to owners! Businesses respond so as to maximize after-tax returns to owners. When firms make less income for a period for some reason, than planned for, indirectly they are forced to pay for it in

some ways. (Source: Ideas about ‘Variation of Tax incident’ are adopted and applied from internet sources, accessed 2012)

Section 21 Individual or Business Taxes?

Who ultimately pays taxes? In Tax PNG’s Review the following needs to be remembered by the Tax Review Committee. That All taxes are ultimately paid by individuals, not the

Businesses on which taxes are imposed. That Businesses can be taxed and may be justified in certain

cases which are shown; Business tax may be more effective and/or less costly to

collect. Business tax may be necessary to internalize externalities.

Business taxes are often used instead of individual taxes for political reasons: That is “Exporting” or hiding the tax. (Source: Ideas about ‘Individual or Business Taxes are adopted and applied from internet sources, accessed 2012)

Section 22 Economic Effects In the course of PNG’s Tax Review, important economic effects should be kept in mind by The Tax Review Committee; 1. Work vs. Leisure: High marginal rates may induce a preference for leisure. Observe how

some PNG rich pay prefer their yacht or golf games more than work. 2. Business Operations: Taxes should not (generally) affect business practices. If it does it would

affect productivity in PNG. 3. Shopping and business location: Sales taxes and excises may affect shopping patterns and

business location in PNG. In PNG generally certain businesses may prefer operating in Lae and not Port Moresby; or Port Moresby rather than Lae etc..

4. Personal financial management: People manage activities and finances to minimize tax burden. Observe activities of some richer PNG businesses .

5. Investment choices: Taxes may make less productive investments preferable. In PNG regional-specific taxes or tax-incentives could be established for poorer rural areas for greater investments in these regions.

6. Savings: Taxes may adversely affect decisions to save. In PNG government should consider encouraging savings as a strategy for certain rural areas and people. This is true where in urban areas many commercial banks have imposed a massive barriers against the poorer or rural people by imposing many fees, costs, deductions or rates etc.. for the most mundane services. It is totally ridiculous! These practices are common place in PNG because different State agencies are very weak in PNG.

(Source: Ideas about ‘Economic effects are adopted and applied from internet sources, accessed 2012)

Section 23 State & Local Taxes and Economic Development

In PNG at this stage of economic Development most taxes are levied by the Central Government through the IRC. In other countries state and local governments worry that taxes may adversely impact economic development.

Taxes have a relatively small effect on interregional location.

Taxes have a much larger effect within a region.

(Source: Ideas about ‘State and local Government taxes and Economic development’ are adopted and applied from internet sources, accessed 2012)

Section 24 Taxation and Externalities PNG is a virtually untouched ‘Paradise’ in terms of her Natural environment and should remain that way for a very long time. Therefore an exception to standard of neutrality for tax efficiency is to address negative externalities.

Emission taxes: Through International Protocol PNG should begin to tax firms and groups that pollute her sublime environment. In PNG there needs to be direct measurement of emissions necessary. Apply to last link—where emissions into environment take place

Indirect taxes on goods and services: Taxes of products and services the production of which produces social costs (pollution, health costs, social services).

Consistent with international protocols charges could include taxing emission from cars, ships, planes, factories

PNG should formally legislate taxes or charges on people littering, dumping rubbish in places that are not designated places. NCD Governor Parkop’s good move in banning betel nut hence littering should be replicated in PNG by an over-arching legislation

Natural Resource or Environment economics is now being taught in University, recognizing importance of the natural environment. Thus at the PNG University of Technology we teach Natural Resources economics. The ‘Material Balance Model’ of this course is based on the 1st and 2nd Law of Thermodynamics.

(Source: Ideas about ‘Taxation and Externalities’ are adopted and applied from internet sources, accessed 2012)

Section 25 Proposals for New Changes and Taxes for PNG More Taxing Powers to the Provincial Government system. The Provincial government is here to stay. With North Solomon Province having an autonomy

status and likely to have a referendum to decide on its future, the New Ireland Province requesting similar direction. Morobe Province under late Utula Samana’s Report for Morobe’s future was considering going along with New Ireland Province. If this is the direction for PNG increased taxing powers should be given to the Provinces. In the long run Provinces may evolve into a Federal type of Center-Periphery for PNG. Granting them more taxing powers now, may prepare province for such long-term eventuality. *One is aware that there was a Review done on the Provincial and Local level Government system in recent months).

Company tax rates and administration. Company tax rates are high and should be reduced and made conducive to growth and development of Small and Medium scale Enterprises. Given there might be various considerations one would not suggest specific tax rate at this stage. Company tax administration should be done electronically and through the internet. PNG should launch her own satellite working with a friendly foreign government . This would help reduce cost of narrow band internet uses have. In turn costs of doing business through internet would fall.

Personal income tax. Personal income tax in PNG may be one of the highest in the world. The Personal income tax in PNG should be reduced. Given there might be various considerations one would not suggest specific personal income tax rate at this stage.

Toll gates for both National Roads & Bridges. Considering massive investment being made on Roads and Bridges, there should toll gates and toll should be collected to offset the costs of investment.

Shipping charges and rates. Considering recent domestic and international shipping disasters, charges and rates should be imposed on ships.

Small craft (boat) charges and rates. Considering frequent coastal disasters on banana boats, rates or charges should be levied at two levels (a) At sellers level . Sellers of Banana boats and engines should be charged with rates every time there is a reported banana boat disaster (b) At ownership and management level. They should be formally registered. Whenever there are disasters the owners and boat operators should be made to pay.

Sanctioned Revenue for Political Parties. Through IRC properly registered political parties should be permitted to raising revenues and donations for the parties. This move will transform democracy in at least three ways (a) Political parties would become financially strong (b) Stabilize political parties to only a few ones (say 4 political parties in PNG at most) (c ) A new culture of political parties would rise up in which PNG people are spared the trouble of having hundreds of parties that mushroom only during election times (d) Democracy would be strengthened.

Incorporated Land groups (ILGs). It should be made a mandatory that 97% lf Lands in PNG be brought into economic production. Indirectly this could be done by passing or amending appropriate legislations making it mandatory for ILGs to be fully registered in PNG. This requirement would have at least three impacts on PNG . (a) When a majority of Lands are registered with the Department of Lands and Physical Planning the PNG people would begin to use their lands for active economic development (b) More economic and business activities would be initiated on the many hundred s and thousands of ILGs across PNG (c ) Many Small and Medium scale Enterprises would rise up and they would in turn generate two impacts, namely employment generation and income generation (d) New employees would create new tax bases for IRC (e ) New incomes would create new tax bases for IRC (f) New firms and corporations would new tax bases for IRC (g) The fact that thousands and millions of hectares of Land in PNG are brought into active production, would have a dramatic effect on price of real estate in Port Moresby and Lae and other towns. The high real estate prices are driven by scarcity of land. When land becomes readily available for houses and dwellings the real estate prices are very likely to crash and make housing very affordable for every Citizen in PNG in the 21st century. This is a 100 years plan for PNG.

Section 26 Conclusion PNG is a new Emerging Market, searching for fresh ideas and paths for

economic her development. PNG’s Tax Review 2013 to 2015 is a way of finding new ideas to forge forward. In this paper one has used basic principles of taxation as a launching pad to provide some review of PNG’s tax rates and systems. The principles presented in the paper are not new; but the contexts applications and some of one’s proposals in Section 25 are new.

For PNG in theory for the sake of income distribution, equity and social justice, progressive tax is preferred. However, progressive tax discourages incentives to work hard, earn more, save more and invest more.

Both direct and indirect taxes have their merits and demerits, ‘but taxes are a

necessary evil and people have to pay taxes if they want their government to do something to the society by way of public expenditure on health, education and infrastructure services etc.

(Source: Ideas about ‘Conclusion’ are adopted and applied from internet sources, accessed 2012)

Acknowledgement I would, like to acknowledge people who have, in one way or another, made the paper possible; 1. I thank and acknowledge the Head of Department, of Business studies, PNG University of Technology, Prof

Chris Mbah, and administrative Officer Mr Wesley Barelae for supporting me to take part in the PNG Tax Review, 2013-2015

2. I would also would like to acknowledge the lively input of my many students of Public Finance, Natural resource economics, and many other subjects, who have, over the years provided much stimulus for academic discussions debates over this and other topics.

3. I would like to thank the Department of Business Studies and PNG University of Technology for providing conducive environment for preparation of this paper.

4. I would like to thank Mr Lucas of the PNG Tax Review Committee, who returned my email and provided the necessary guidelines or advise on how I might proceed with the Tax Review.

5. I would like to acknowledge the use of books, materials, and Internet sources that were accessed in the course of preparing materials for my students, some of which are adopted appropriately edited and presented in this paper for PNG Review 2013-2015.

6. I would like to acknowledge and thank my good and patience wife and children, for putting up with me, when I worked late on this paper and turned up at home, at odd times; sometimes nearer mid night.

7. Disclaimers: I have read and referenced other peoples’ work and digested them to prepare this paper. All errors or judgment or omission are mine own.

(Gomi J Gipe, Applied Economics, Department of Business Studies, University of Technology)

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