Letters & Opinion

Why Not a Tax Season Here?

By Marvin Bartholomew

MOST people know what an interest rate is. What may have escaped many is that there is such a thing called a negative interest rate. In recent times, this extraordinary step has been taken by a few major central banks around the world in an effort to revive sluggish economies by coaxing commercial banks to make loans. As of March 30, the central banks of Sweden, Denmark, Switzerland, Japan and the Eurozone have all instituted negative rates.

As normal practice, commercial banks deposit reserves with central banks and that is all well and good. But when economic data looks bad or banks become concerned about the rate of default or the ratio of underperforming loans they’re carrying, they tend to get shy about making new loans. This then becomes self-fulfilling prophesy because when banks don’t lend, it can have the effect of speeding up the very economic decline they are worried about. Consumers can’t borrow and so they spend less and hoard the cash they have, businesses cannot borrow to fuel their activities, so they also cut back, including cutting back on hiring, and the overall effect is that there is less money changing hands and driving the economy.

Once reports of an economic slowdown become widespread, the slowdown accelerates, the cycle is perpetuated, consumer confidence drops – everything heads in the wrong direction.

So to forestall this, central banks try to get commercial banks to remove their money from deposit and instead use it to make loans. And this is how negative interest rates get their foundation. If commercial banks were getting an interest rate of 0.5% for monies on deposit and then that drops to 0.25%, they’re now getting less of a return. But many might still consider that position less risky that lending the money. Applying a negative interest rate creates strong(er) impetus to move the money out. It’s a push, if you will. Essentially, commercial banks are charged to keep their money on deposit. It’s one thing to earn a low interest rate but at least you’re still earning. It’s another thing to earn a 0% interest, you’re still not losing. But no one wants to pay to park their money.

Kids, think of it this way, it’s what would happen if, instead of getting an allowance, all of a sudden your parents started charging you rent!

Stay with me, I’m getting to the point.

All this led me to consider a negative interest rate of a whole different kind. If you, like thousands of St. Lucians this month, filed your taxes and – on the face of it – were in the fortunate position of having a net positive return, that is, the government owes you, you’re well aware that unless you’re somehow able to get your return right away, the wait time for that money could be over five years.

Here’s the bummer. All the while that you’re waiting, that money is losing value every year. Take for example $1000 that the government owed you from 2010. At the published annual rate of inflation from 2010 to 2014 and using the average to project for 2015 and 2016, assuming you get the money in 2016, inflation would have robbed you of $154.53! Put another way, by the time you got the money, the $1000 is now worth only $845.47. You’ve lost a total value of 15.45%.

Of course, another painful part of all this is that if you had owed the government, you would rack up 10% one-time late fee plus monthly interest of 1.06% so that the $1000 would now be $1839.52!

And this is how this is all connected to negative interest rates. The tax return that you’re unable to collect in that time is technically a loan that you’re giving to the government at a negative interest rate. Instead of earning an interest on that loan, you’re paying the government to borrow that money from you.

To be fair, this isn’t the government’s underhanded attempt to get money from you (at least we collectively hope so). It’s an issue of cash to pay and available resources to process the many returns. Reports from IRD is that they are now up to 2010 which means there is a five year lag. I am told that the Comptroller is trying to get that timeline down to one year. But at the current rate, if you’re due a return in 2016, you’ll see that money in 2021! Your Form one child would be graduating – perfect timing, you may well need the money – and whoever gets elected in the US in November will either be out or on their second term.

While we’re on the US, perhaps we could figure out a way to make the tax returns work for our economy as it does for theirs. US tax season is almost like a second Christmas for many. Businesses know that tax season presents an excellent opportunity to boosts sales. The auto industry in particular gets a nice kick. As millions of people get their returns, those cheques turn into down-payments for cars, houses, appliance purchases etc.

Estimates are that yearly returns for Saint. Lucia are between seven and 10 million! It is precisely that sort of liquidity that can give the economy a kick. So in addition to Christmas, St. Lucia Jazz and carnival, we might well all be able to look forward to tax season. It will make tax payers happy and an economic push is sure to make any Finance and Economic Minister happy. So how about it Mr. Finance Minister?

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