A progressive versus a proportionate taxation system from a Maltese perspective

Abstract

Purpose: The Maltese tax system can be regarded as a hybrid taxation system. Consequently, this dissertation focuses on the implications of progressive and flat rates from different perspectives, namely, the taxpayers, tax practitioners, and the tax authority. Design: This study aims to fulfil its objectives by analysing existing foreign literature on the subject of flat versus progressive rates, while providing an overview of how these methods of tax are implemented within the Income Tax Act. Moreover, the researcher interviewed three groups of respondents, namely, taxpayers, tax practitioners, current and past employees of the Inland Revenue Department, as well as the Commissioner for Revenue, thereby obtaining a fair volume of information, including opinions, during the semi-structured interviews. Findings: It transpired that progressive rates support the critical principle of fairness; however, when it comes to sources of income normally forming part of one’s investment, the interviewees were inclined to prefer flat rates. This was mainly driven by three factors, namely, the control mechanism that is enabled by the flat rates in Malta against tax avoidance, in some cases, enabling tax to be withheld, the fact that it is acknowledged that a lower effective rate is allowed on income which is derived from sources other than the primary income generating activity of the individual, and the incentives that can be provided through flat rates to encourage higher revenues gathered from particular areas or sectors. It is recognised that many of the above advantages of the flat rate are linked with the assumption that a flat rate is usually lower than progressive rates. Conclusion: The Maltese taxation system is using the progressive and proportionate rates in an exhaustive way, and further studies may be conducted to identify other areas to which the flat rate can be extended in Malta, although these may be limited. In certain cases, distortion is created between different sources of income, groups of taxpayers and industries in general. In this respect, there is the need to ensure that future implementation of flat taxes does not contribute to this issue. Implications: The tax authorities should seek to resolve distortions created by the different systems implemented in Malta. Moreover, the flat tax should be extended to other sources of income, given that its implications are thoroughly studied prior to such implementations.