Only together can we hope to bring positive lasting change

THE CONVERSATION

Hello Conversationalists in American Samoa! It is my honor to be with you once again this week.

Much thanks to Mr. Tom Drabble who was the main contributor to our column last week! I know there has been lots of discussion about what he suggested, and I look forward to hearing more from our readers.

Remember, none of us is as smart as ALL of us. Only together can we hope to bring effective and positive lasting change.

This week I am including another piece that Tom had sent to me with regard to recommendations he made to the Department of Commerce at their request over a year ago at this point. I'm including a portion of that communication below.

Sadly, according to Tom there was no reply given to him regarding his recommendations.

Here's an edited email that was sent from the current director of the Department of Commerce in 2016. (Director name omitted.)

Sent: Tuesday, June 14, 2016 4:39 AM
To: Tom Drabble
Subject: Revenue raising ideas for ASG

 After some pleasantries were exchanged in the email, this was the request:" ...So can you compile your list of revenue generating ideas and send to me asap.  DOC is working on pieces proposed legislation for the upcoming legislative session and this includes the lowering of the top corporate tax rate to its current level in the US. 

I look forward to your immediate response.

Regards,

Director, Department of Commerce

Government of American Samoa "

FYI.

This e-mail was sent to DOC in June last year. No response received.

These are my thoughts only and were not endorsed by the Chamber.

--THD

From: Tom Drabble
Sent: Thursday, June 16, 2016 1:18 PM
To:Subject: RE: Revenue raising ideas for ASG

To: Director, DOC ---Here is my initial take on your request. The Chamber is taking the liberty of circulating this amongst the Business Community with the hope that additional constructive ideas can be garnered. This is a great opportunity for the private sector to be engaged and supportive (hopefully) of ideas to improve our economy and community.  THD

 Talofa Director _____________ ,

 Thanks for the opportunity to discuss revenue generating ideas for ASG.

The current tax code has evolved because too many revenue decisions are made in haste. Taxes have been added simply because they are “easy” with little thought as to the true effect. The private sector is your tax collector and as such, government/private sector discussion and co-operation is imperative  for any chance of success.  Taxes and fees can be either destructive or constructive and every care must be taken to understand the pro’s and con’s of each and every revenue measure contemplated. Massive hardship and destruction of business opportunities or discouraging the development of entrepreneurial ideas and skills are most often the result of poor tax planning.

 To develop a sound tax plan, the following concepts should be kept in mind:

 1. The more that Government takes out of the community to maintain a bloated bureaucracy, without economic development to support such activity, the more abject poverty that will follow.

2. Keep as much income in the hands of low-income workers as possible.

3. Encourage the development of new businesses, especially in the areas of primary production (fisheries, tourism, agriculture, light manufacturing) or import substitution, by adopting a meaningful Tax Exemption plan. This should be designed to increase the tax base over time, and employ such tactics as Accelerated Depreciation or incentives based on increases in employment. Whilst Accelerated Depreciation initially lowers taxable income, the true effect is to DELAY taxation to future years, having given such businesses every opportunity to thrive and grow in their early years, when interest expense and mortgage payments are at their highest levels.

4. Make it SIMPLE and EASY for any qualified citizen to acquire a Business License. This should be a simple and inexpensive registration process and place the obligation on each business to file employment taxes, file annual returns etc; Instigate high penalties for non-filers.  Leave such things as tax obligations, debt collection, zoning considerations and other current restrictions, to those agencies directly to enforce their own statutory requirements and/or debt collection processes.

5. Keep the cost of doing business as low as possible. In other words, such things as massive business license fees and fees and taxes charged  (e.g. Excise taxes collected at the dock or excessive fees on commercial vehicles such as taxis and rental cars) are counter-productive to running a profitable business. As a rule, taxes should be exacted at the end of the business cycle. E.g.: Income taxes and Sales  taxes.

6. Encourage employment OUTSIDE of Government. Privatize operations at any and every opportunity to create a Taxpayer base rather than a burden on Government funds with the resulting inefficiencies inherent in any Government enterprise.

7. Avoid imposing taxes on previously taxed items. E.g.: Adding a Sales Tax without at the same time removing excise tax provisions. This would be met with fierce objections

8. Ensure that the Tax Department is fully funded in their Audit Department, i.e. ensure that all current taxes are effectively collected. It is senseless to impose new or revised revenue measures when enforcement is non-existent.

9. Encourage ASG departments to make economic development opportunities available for private investors. E.g.: PORT ADMINISTRATION. With by far the best harbor in the South Pacific and easy access to USA for repair parts etc, we should be the hub for  marine activities in the South Pacific. We should have a viable, revenue generating Marina and be the preferred haven for many of the thousands of pleasure yachts plying the Pacific at any one time. We should have a viable small boat haul-out and repair facility, along with thriving specialty support businesses that would follow.

10. Maintain accurate statistics to enable an accurate assessment of the effect of any revenue generating idea.

 Some ideas:

 1. Lowering of the top corporate tax rate to its current level in the US.

I have no idea of the effect of this. Most small businesses file as a Sub-chapter “S” Corporation and will not be affected.

 2. Currently the law provides for NO TAX on imports for personal use

This is a ridiculous provision, favors higher income residents and is totally detrimental to local businesses. Low-income workers are forced to buy 100% locally, which currently includes excise tax; wealthier residents, who generally hold credit cards and direct connections regarding shipping etc import a host of goods. Such things as furniture, appliances, building materials, computers and many other high-end items enter entirely tax-free.

RECOMMENDATION: Stipulate tax-free exemption to say $100 value or $200 value at the most. Otherwise pay full excise tax (or sales tax if in effect) for personal use imports.

Benefit: Eliminate favored tax treatment available only to wealthier individuals.

Tax Gain: $500,000 or more.

3. Eliminate 5% General Excise Tax and replace with 5% (or 7%?) Sales Tax:

Whilst a Consumption Tax is not ideal, most States and countries have adopted some form of a Sales Tax or end user Goods and Services Tax (GST) which is basically the same thing. It is certainly preferred, eliminating up-front costs to business and maximizing Government revenues. To have both a General Excise Tax and a GST base is simply double taxation and must be avoided.

 For example: (Assuming 5% Excise taxcollected on arrival)

               Typical costing for food items:

Suppose the ex-factory cost of an item is                $10.00

Add Excise tax @ 5%............................ ...                         .50

Add shipping costs (Say 25%)……………………   $  2.50

Add Insurance, trucking, misc costs 5%....                     .50                 

                              LANDED COST:………………       $13.50

ADD: Wholesale/Retail mark-up say 30%..              $   4.05

                        CALCULATED SELLING PRICE:..   $17.55

Example: (Assuming 5% Sales Tax)

               Typical costing for food items:

Suppose the ex-factory cost of an item is                $10.00

Add shipping costs (Say 25%)……………………   $  2.50

Add Insurance, trucking, misc costs 5%....                     .50                 

                              LANDED COST:………………      $13.00

ADD: Wholesale/Retail mark-up say 30%..              $   3.90

                              Calculated Selling Price..                $16.90

Add SALES TAX @ 5%............................ ...                       .85

                        CALCULATED SELLING PRICE:..   $17.75

In the first example the Government has collected 50c vs 85c collected using a sales tax. AND the cost to the consumer has only increased 20c.

Here is another example, more appropriate to clothing, hardware items etc:

(Assuming 5% Excise tax collected on arrival)

               Typical costing for other retail items:

Suppose the ex-factory cost of an item is                $10.00

Add Excise tax @ 5%............................ ...                         .50

Add shipping costs (Say 25%)……………………   $  2.50

Add Insurance, trucking, misc costs 5%....                     .50                 

                              LANDED COST:………………      $13.50

ADD: Wholesale/Retail mark-up say 60%..              $  8.10  

                           CALCULATED SELLING PRICE   $21.65

 Example: (Assuming 7% Sales Tax)

               Typical costing for other retail items:

Suppose the ex-factory cost of an item is                $10.00

Add shipping costs (Say 25%)……………………   $  2.50

Add Insurance, trucking, misc costs 5%....                     .50                 

                              LANDED COST:………………      $13.00

ADD: Wholesale/Retail mark-up say 60%..              $  7.80  

                              Calculated Selling Price..             $20.80

Add SALES TAX @ 7%............................ ...                   1.45

                       CALCULATED SELLING PRICE:..   $22.25

In this example, ASG has TRIPLED their revenue and sell price has only increased 60c or less than 3%.

If 5% excise tax revenue is currently $8,000.00, under the above scenario revenues would be more like $24,000,000. This certainly justifies a reduction in MINIMUM INCOME TAX by 2% which would compensate low income earners to make up for the higher selling prices. This 2% reduction only affects taxpayers who do not reach any part of Tax Tables in effect.

I believe that these figures are conservative because:

a. Services such as legal fees, accounting fees and other labor add-on sales would attract Sales tax’

b. Cigarette and liquor  should hold their present import fees PLUS attracting this new Sales Tax.

c. Restaurants and other high labor cost sales would also attract this Sales tax rather than import tax on raw materials only.

d. Likewise auto sales would hold their current 10% Import Tax PLUS the new Sales Tax.

 I will expand further on the advantages/ disadvantages of eliminating the surcharge of 15% on commercial vehicles and replacing it with increased annual user fees.

 Regards

--Tom

 What are your thoughts? Of course this is one man expressing his views and opinions as to what would work here compared to what has been. 

Do you agree with what he is saying? 

Do you have ideas to add to what he is suggesting?

In our next column, we will look at both Tom's suggestions this week and last week and try to address some of them specifically. 

If you have any thoughts to share with me, they may be included in the column next week with your permission if they help people better understand what could be done. 

Let's hear what you have to say!

 Until next time, keep The Conversation going, American Samoa.

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