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Taxation in Malta.

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Taxation refers to the compulsory transfer of resources from the private individuals, institutions or groups to the public sector. Taxation can be classified under two types: direct and indirect taxation. Taxes that are levied directly upon wealth, income and capital gains are called direct taxes. Indirect taxes are those, which are additionally charged on prices or on the quantity of goods sold. Official documents issued by the Maltese authorities give four main objectives to taxation in Malta. > Ensure an adequate and regular flow of revenue to government > To be adjusted in light of Malta's relation with European Union > To stimulate saving and capital formation as well as direct investment and personal efforts into productive channels. > To ensure that financial burdens be borne by those most able to carry them. Since Malta gained independence, we have experienced various changes in taxation policies, both on the income and expenditure side. In fact the affects of taxation can be divided under two main categories. These are the Micro and Macro affects. According to microeconomic theory, tax changes affect a person's willingness to supply effort. This happens because taxation affects the relative price of work and leisure. The Macroeconomic theory states that changes in taxation have impacts on consumption and saving-investment decisions, in turn affecting total revenue collection. In order to see how tax burden is influenced today one has to consider the taxation history of the country. This is so since taxation is not a static event. The following are the main events in the taxation history of Malta. The government needed a type of taxation that managed to collect revenue for the government over time. ...read more.


The other method consists of an international comparison. In this case one can also use regression techniques in order to derive an internationally equivalent tax rate for the Maltese economy for the year 1994. A country's tax burden is estimated by dividing the total amount of taxes paid by the GDP, that is, (sigma) sigma taxes /GDP). If we consider the international tax structure, studies have indicated the existence of a progressive element. This means that richer countries pay proportionally more tax than the less well-off (Delia 1982). So we can fit a regression line relating a country's tax burden to its GDP per capita, using data for different countries. The countries chosen are OECD countries. The following data for the OECD countries is shown below. Country Tax rate (Total tax receipts/GDP) GDP per capita at current prices (GDP at current prices/ Poulation) GDP at current prices and exchange rates (billion US$) Population (thousands) Austria 42.8 24670 198 8031 Belgium 46.6 22515 228 10113 Denmark 51.6 28181 147 5206 Finland 47.3 19106 97 5088 France 44.1 22944 1,329 57960 Germany 39.3 25133 2,046 81407 Greece 42.5 9167 96 10426 Ireland 37.5 14550 52 3571 Italy 41.7 17796 1,018 57190 Luxembourg 45 35281 14 398 Netherlands 45.9 21733 334 15382 Norway 41.2 28434 123 4337 Portugal 33 8792 87 9900 Spain 35.8 12321 482 39150 Sweden 51 22389 197 8781 Switzerland 33.9 36790 257 6994 Turkey 22.2 2157 131 60573 United Kingdom 34.1 17468 1,020 58375 We can plot the data and see the various GDP's at current prices of the countries for different tax rates selected. So the rate formula can be a linear equation: T = bo - b1Y Where T = tax rate Y = GDP per capita in terms of a common numeraire (Us Dollars) ...read more.


In the same way, subsidies to industry may be made either through tax credits that reduce tax receipts or through grants, which do not affect them. Between the 1990 till 1994 an Incomes policy agreement was established between the government ,trade unions and employers` representatives. Incomes policies are designed to control or guide the growth of incomes of the various groups in society, including wage and salary earners, professional groups, the self-employed and businessmen. These are normally directed at ensuring that none of the above groups abuses any market power it may possess. What is interesting is that this incomes policy effected receipts from income tax. All these factors, once more proves the fact that tax administration regime can change the impression of tax burden. In the international model we used in our comparison, we should not forget that data for some OECD member countries still refer to fiscal years. In the case of Malta we use Calendar years. To conclude we can say that tax indices should be considered primarily as "indicators of general tendencies rather than of exact tax behaviour1" . Strictly speaking from our final analysis we can see that both underground economy and administration of tax regimes can be the culprits of undervaluing tax burden. However as we know the figures we have are only summary of statistics as regards tax indices and do not distinguish between the various types of taxes and government commitments in the various countries. For example the tax ratio in Sweden is one of the highest of the OECD countries. However this has to be seen under the perspective of the commitments to welfare of the Swedish government. APPENDIX 1 1 Delia 1982 Ec 304 Public Sector Economics 1 Mirko Mallia 1 ...read more.

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