Issue link: https://maltatoday.uberflip.com/i/1174220
IT was the last Budget delivered in Maltese Lira and the one that would see the country through to the 2008 election. Then prime minister Law- rence Gonzi, who doubled up as finance minister, proposed wide-ranging income tax cuts and higher Children's Allow- ance payments. Delivered on 15 October, the Budget was intended to boost the feel-good factor in the coun- try in anticipation of Malta adopting the euro on 1 January and the general election that fol- lowed in March. A week later, Alfred Sant stood up in Parliament to deliver the Opposition's reaction to the Budget. It was going to be hard to counter what was widely per- ceived as a good Budget. But Sant did manage to steal the limelight with a proposal to make all overtime tax free. The proposal was exciting de- spite the government claiming that the tax cuts it proposed meant that most people boost- ing their wage with overtime were only paying a maximum of 15% in income tax. Making overtime tax free was not exactly a new thing: The La- bour Party's proposal followed the introduction of a similar measure in France by then-pres- ident Nicolas Sarkozy. The idea behind the proposal was to encourage people to work more, while leaving more money in people's pockets. The PL proposal found sup- port among unions but econo- mist Lino Spiteri had back then cautioned against making overtime completely tax free because it risked punching a bigger than anticipated hole in public finances, while exposing workers to lower pensions. Cutting tax on overtime means that income from the additional hours will not be added to the basic pay and therefore not taxed at ordinary income tax rates, leaving more money in people's pockets. However, any such proposal comes with significant risks for public finances and pensions. Employers and workers in places of work that are not cov- ered by collective agreements may agree to reduce the rate of pay on basic hours and shift the balance onto overtime hours. In this way, employees will be earning more as a result of less tax being paid on overtime, while the cost of NI payments for employers will be reduced. This will, however, have a neg- ative impact on the employee's future pension because NI is calculated solely on the basic pay. And the abuse could leave the finance minister with a shortfall in revenue that could be hard to recoup. The Labour Party made the overtime pledge a key plank in its 2008 election manifesto, which was countered by an ambitious reduction in income tax proposed by the Nationalist Party. The PN went on to win the election but failed to deliver on its income tax pledge, which was only implemented by the newly elected PL government in 2013. Meanwhile, the overtime pro- posal was buried, and forgotten. It was 10 years after Sant stole the budget limelight that cut- ting tax on overtime resurfaced in the PL manifesto for the 2017 election. However, this time around the PL proposal was packaged in cautious wording, fully aware of the pitfalls that could accom- pany such a measure. The PL manifesto proposed: "We will gradually reduce the tax on overtime." It did not specify how. So far, the government has not implemented the overtime measure and in its pre-budget document, the Opposition has suggested taxing all overtime hours worked above the 40 hours per week at a flat rate of 10%. GWU general secretary Josef Bugeja believes the fears on cut- ting tax on overtime are mis- placed. He said the benefits to em- ployees of having a reduced overtime tax rate far outweigh the abuse that may take place. The GWU had proposed a 10% tax on overtime payments and a reduction of the part-time rate to 10% in its proposals to the political parties before the 2017 election. The PL had embraced the sug- gestions and the PN has now warmed up to them and in- cluded the proposals in its pre- budget document. Bugeja said the work ethic of Maltese employees was such that many worked overtime because they wanted that extra cash to buy a new car, invest in a house, or make that extraordi- nary expense. "Taxing overtime at a flat 10% would be an incentive for people to work more and earn more… I can't exclude that abuse could take place but it would be too complicated a process to reduce the basic pay and shift income to overtime, to make it worth- while," Bugeja said. He added that 59% of all Mal- tese workers were covered by collective bargaining, which would definitely offer safe- guards against abuse. But Bugeja insisted that an employee who chooses to re- duce his basic pay would be put- ting himself at risk. "Apart from having a lower pension, over- time is at law the management's prerogative and so any overtime hours could be terminated at will, leaving that employee ex- posed to lower pay." Joseph Muscat has repeatedly said that manifesto pledges will be implemented. Cutting tax on overtime is one of them and for many workers who boost their pay with overtime, the measure cannot come too soon. 8 maltatoday | SUNDAY • 6 OCTOBER 2019 NEWS Overtime is currently taxed at normal income tax rates but there are growing voices calling for a low tax rate on extra hours worked. KURT SANSONE reports How should overtime be taxed?