Income tax and state revenue

The National Weekender
TAXATION
How much does altering one impact the other? – Main points of a research presentation at the 2023 PNG Update hosted by the University of PNG and the Australian National University.
Students and public attending the 2023 PNG Update at the University of Papua New Guinea’s Waigani campus from Aug 17 to 18.

By KELVIN JOE
MANY significant issues of national interest were highlighted during the recent 2023 PNG Update organised by the University of Papua New Guinea (UPNG) School of Business and Public Policy and the Australian National University Development Policy Centre at the UPNG Waigani campus.
This annual update is the premier forum for discussions of research and analysis relating to contemporary economic and public policy issues in PNG.
Presenters comprised of highly qualified experts from various organisations and institutions who highlighted challenges and prospects in social, economic and political issues affecting the country.
Topics included economic issues, gender and society, agricultural commodities, impacts and mitigation of climate change, tourism and development, education, gender, family and sexual violence, public sector and governance, agricultural policy, development and service delivery, development and change, how people respond to major disasters, and mining and development case studies.
The forum also covered the review of the form and system of government, the question of the election of the prime minister by the people, forestry and agriculture, crime and corruption, development issues, politics and governance, banking and finance, gender and leadership, agriculture and food security, urban and rural development.
This article highlights only one component of the economic issues based on the question, “Can the adjustment of average personal and company income tax rates (APITR) sustain government revenue and taxpayers’ welfare?” It was presented by Solomon Kasingu, a researcher at the Bank of Papua New Guinea (BPNG). The presentation was based on his two research papers: Dynamics of APITR adjustments in Papua New Guinea-Structural Vector Autoregressive (SVAR) Model at BPNG from 2016-2020, and “Short-run and long-run parameters of the key components of government revenue in Papua New Guinea-Autoregressive Distributed Lag (ARDL) Model,” a master’s degree major research paper at UPNG from 2019-2020.
According to his presentation from these two major research papers, the answer is “Yes”, the reduction in APITR can sustain government revenue and improve taxpayers’ welfare.
The focus of Kasingu’s presentation was directed to the following questions and objectives:
Is the reduction of APITR feasible, and can it sustain government revenue and improve taxpayer’s income?
And in the event that the reduction in APITR cannot fully sustain government revenue, is the adjustment of the average company income tax rate (ACITR) feasible to fill that gap and at the same time sustain company profits?
The aim is to achieve a win-win situation where a reduction in APITR is able to sustain or improve government revenue, improve personal income and sustain company profits.
The first research paper was based on the structural vector autoregressive model (SVAR model); where his study was done at the Bank of PNG, and it was aimed to see the effects of tax shocks on the unobserved variables such as tax bases and government revenue and see their effects over a time horizon.
“It was claimed unobserved variables because these variables were calculated as a percentage of gross domestic product (GDP),” Kasingu explained.
“In terms of the shock effects, they are temporary and not permanent as they die out over time.”
The second paper was based on the autoregressive distributed lag model (ARDL model) to establish the short-run and long-run parameters of Government Revenue. The presentation indicated that any shortfall in government revenue created by a reduction in APITR would be assisted through the adjustment (increase) in ACITR.
“One per cent reduction in APITR will cause personal income tax base (PITB) to decline by one per cent hence, will cause government revenue to decline by 0.49 per cent, so on the same if government reduces APITR by 10 per cent, the PITB will decline by 10 per cent causing government revenue to fall by 4.9 per cent,” Kasingu added.
“Now if it chooses to reduce APITR by 100 per cent, the PITB will decline by 100 per cent, for example, no personal income tax (PIT) to government and its revenue will fall by 49 per cent (almost 50 per cent).”
Kasingu said PITB ended up with the taxpayers as their disposable income (improved salary), and they would spend to sustain and improve their welfare such as necessities, education, medical, insurance, properties, vehicle, leisure and travel.
“These monies will eventually end up as goods and services tax (GST) collection,” he said.
The study shows that when GST increases by one per cent, government revenue will increase by 0.43 per cent. If the results were amplified at a 10 per cent increase in GST as a result of the reduction in APITR, government revenue would increase by 4.3 per cent.
“At a 100 per cent increase in GST as a result of a 100 per cent reduction in APITR and PITB, government revenue will increase by 43 per cent. So basically, there is a tradeoff of around 0.06 per cent (if APITR is cut by one per cent), 0.6 per cent (if APITR is cut by 10 per cent) and 6 per cent (if APITR is cut by 100 per cent).
That shortfall can be met by an increase of the average company income tax rate (ACITR) by one per cent, or GST rate increase by one per cent or an increase in collection coverage or investments to meet the shortfall.
The research indicated that Government would be able to sustain its budget revenue through GST collection even though it reduces APITR. And the Government will achieve a win-win situation where it eases the tax burden on taxpayers and maintains its revenue.
It is basically a transfer of personal income taxes back to taxpayers as additional income, and they will spend to improve their welfare, hence ending up as GST collection and revenue for the Government, and the cycle continues.

Government revenue and budget deficits. The blue line represents the steady growth of government revenue on quarterly basis since 1981 and that is reflective of growth in the economy over the years. The red line shows the cycle of the types of budgets, the Government had implemented since 1981. It was until 2012 when the Government persistently delivered deficit budgets to this day.

Taxation
Taxation in PNG is empowered by the Income Tax Act and supported by the Goods and Services Tax Act and other related laws.
The Department of Treasury manages government tax policies, while the Internal Revenue Commission (IRC) looks after the administration and collection of taxes. The Government continuously relies on tax revenue to fund the budget to deliver basic goods and services and capital investment projects.
Prudent delivery of the national budget contributes to the economic growth and development of this country. Deficit budgets often stimulate economic growth, and the recent history of PNG budgets follows a deficit trend and continues to this day.
Tax incidence or burden in PNG
In 1981, there was an estimated average group of 951 personal income taxpayers that supported a population of about 3.7 million people with their income tax contribution. The ratio of the tax burden is one taxpayer to 4043 people. In 2014, the number of personal income taxpayers increased to a peak of 33,000 taxpayers supporting a population of about 8.1 million people. The ratio of tax burden is one taxpayer to 244 people.
For example, an active taxpayer earns an average income of K117,000 (gross) annually between 2008 and 2021, pays around K34,000 in tax annually (that is around 29 per cent incidence), gets a three-dependent rebate relief of K1,050 annually (that is around 3.1 per cent relief).
That in itself is insignificant to relief taxpayers.

Government
A Government’s proposal through the leadership of James Marape to reduce APITR since last year could be realised based on this empirical research studies.
Kasingu‘s research says the reduction in APITR can sustain Government revenue and improve taxpayers’ welfare. It also indicates that the shortfall in government revenue created by reduction in APITR would be assisted through the adjustment or increase in ACITR.
Internal Revenue Commission (IRC) Commissioner-General Sam Koim said in May that the IRC was working on a proposal that the Government would reduce personal income tax while also proposing to increase consumption (goods and services) tax.
“We would like to collect tax effectively, while the commission has proposed to the Government to reduce the salary or wages taxes,” Koim told this paper.
He said the proposed reduction would see private and public sector employees have extra in their wages.
Koim had discussed with Marape on the proposed IRC plan to reduce the salary wages taxes for the next few years.
Earlier this year Marape said in a panel discussion also at UPNG along with Opposition Leader Joseph Lelang, that he had asked the IRC last year “whether we can reduce personal income tax.”
Marape, however, said IRC (explained) that the system was configured in a way that it would be hard to implement a reduction.
That is the reason the Government increased the non-tax pay threshold to K20,000.
Government can certainly reduce the APITR based on this empirical research studies so that the public and private sector employees would have extra cash in their wages and, at the same time, the Government would able to improve its revenue through adjustments.