Chitty-Chitty Bang-Bang is the movie I most identify my childhood with. Its mixture of fantasy, immortal melodies, light romance and innocent comedy left a lasting impression on me – I have enjoyed seeing it with my children even more. The musical though has a macabre bit; specifically the 40 minutes during which the Potts and Truly Scrumptious visit the strange barony of Vulgaria on their flying magical Chitty. I don't know how many of you remember this place. For those of you who don’t, Vulgaria was a place ruled by a loony Baron named Bomburst and his wife, the loonier Baroness Bombursty. The wicked lady disliked children to such an extent that all the children of Vulgaria were taken away from their parents and hidden away in a cave. Remember it now?

Well, when I think about our tax system it reminds me of Vulgaria because sadly, our income tax, as revised in 1999, was designed in a way that completely ignored children. In what way you may ask? Taxation on personal income at present only differentiates between people who are single and those who are married. It does not differentiate between people with and people without children. What is worse is that in a number of cases the system is actually disadvantageous towards people with children.

Example: a married couple without children where each partner earns Lm6,000 per annum pays a total of Lm1,160 in income tax. On the other hand, a married couple with three children and one breadwinner earning Lm12,000 a year pays Lm1,968 annually in income tax. Bottom line is that the family with three kids pays more (rather than less) tax; a whopping Lm808 more – not exactly a go-forward-and-multiply policy.

Now I can understand that the tax system may, back in 1999, have been reformed with the intention of increasing the labour participation rate, however it (perhaps inadvertently) forgot the existence of children and the cost of raising them. One hell of an oversight, eh?

What is worse is that at the time, the entitlement to children’s allowance for those earning over Lm10,000 had already been taken away. In my opinion the removal of the child tax credits coupled with the subsequent elimination of children’s allowance for middle-income families were the most fiscally insensitive, socially ill-designed and family-unfriendly measures take by any Nationalist administration since 1987. In 1999, may I remind you that, the Minister for Social Policy was Lawrence Gonzi?

Change is just and is overdue. The State should try to reverse, at least through fiscal means, the growing trend of smaller families by providing some tax relief to encourage parenthood. The Green Party, in its recommendations for changes in our tax systems for the forthcoming budget, has recommended the re-introduction of a child tax credit, albeit not expecting anything dramatic considering the dire straits government finances are in. Even a 1,000-mile “tax” journey begins with the first step.

Studying our tax system (a most boring undertaking, as you can well imagine) one realises that there are other cases where there is a serious lack of differentiation between activities that do indeed require distinction. The worst, in my opinion, is that all companies (apart from foreign manufacturing firms which operate virtually tax free) pay a tax rate of 35 per cent on their taxable profits. Our tax laws do not distinguish between a micro-company employing five people and our large banks with payrolls numbering close to 2,000. Bank of Valletta plc, enjoying almost 50 per cent market share of a service sector with super-high barriers to entry, and netting Lm18,405,000 in profits in the year ended 30 September 2004, was subject to the same tax rate as your corner stationery, which probably managed a profit of Lm2,500 after paying the owner-worker a salary of Lm400 a month. For the Greens, the situation is outright ridiculous and quashes government rhetoric on the strategic importance of small enterprise.

A good number of EU countries spare small companies the cheap paeans on “muturi ta’ l-ekonomija” (small companies are the motors of our economy) and grant them am advantageous tax rate. Putting your money where your mouth is credible politics. This is the second year that Alternattiva Demokratika is calling on the government before budget time to introduce a small companies’ tax rate. I sincerely hope we do not have to go through the same motions again in 2006.

One more example. The indiscriminate way in which stamp duty is levied on inherited property is another area that needs revision. Let me explain. If Mr Abela inherits a flatlet worth Lm35,000 (not exactly a handsome patrimony) he must pay five per cent stamp duty to transfer the property to himself. Mr Galea inherits eight properties valued collectively at Lm750,000 and is subject to five per cent duty as well. In our opinion this warrants a re-think. A more progressive scaling of stamp duty would be more socially just. We believe that the first Lm80,000 of property inherited should be subject to a lower stamp duty rate of say three per cent, with the current five per cent rate kicking in for properties worth between Lm80,000 and Lm150,000. To make up for the drop in income if any, the portion of inherited property over Lm150,000 could be subject to a marginally higher tax rate.

A challenge I personally present to Parliamentary Secretary Tonio Fenech is to make arrangements with the commercial banks, this time to grant people a reasonable credit period in which to settle the stamp duty. Nobody (especially those still mourning) facing temporary liquidity problems should be pressured to sell inherited property.

Indirect taxation is, by its nature, the most regressive of taxes. Worse still is that most goods and services are taxed at a uniform 18 per cent. At the extreme, we note that baby prams and fuel-devouring SUVs are taxed in the same way. AD is, for the 10th year in succession, advocating an increased VAT rate on items such as high-powered vehicles and expensive jewellery. The additional revenue can be directed towards lowering VAT on items that impact the cost of raising children such as baby wear, children’s clothing and school stationery. If lowering to five per cent is unaffordable to government, Tonio Fenech (like me, father of a young family) can press his boss to introduce an intermediate VAT rate of say 10 per cent. If he accedes to our request, I promise not to accuse him of harbouring a conflict of interest.

Do we have a deal?

Edward Fenech is the spokesperson on Finance, the Economy and Tourism of Alternattiva Demokratika – The Green Party