Tax allowance must drive savings

This, as a direct result of the replacing of "current rates of Personal Income Tax of 25 % and 30% with a single rate of 25 percent."

While this will place more money each month in the hands of taxpayers, people need to be careful as to what they end up doing with their money. It is not that we are telling people what they should and should not do but sounding a cautionary note.

The additional money could either be invested or spent wily-nilly on consumer items.

It would be a shame if it were the latter because extra spending is not what the economy needs right now.

Indeed, the widely anticipated increase in excess liquidity in the system, and resulting overheating of the economy, based on the certain rise in monthly retained incomes after PAYE deductions may turn out to be a mirage. Already, economists are warning that increased consumer spending might just lead to a spine in inflation, something the economy can do without.

What must be clearly understood is that the $35,000 hike in the personal allowance and the across the board 25 percent tax are not in addition to existing benefits, but rather that several of the crucial allowances will be eliminated : the child allowance of $1,200; allowable loan interest during construction of or first time acquisition of a house which must be owner-occupied, limited to $10,000 a year; net increase in Credit Union/Co-operative Society shares, up to a maximum of $10,000 and the 25 percent investment deduction in respect of equity investments in hotels.

The fears of additional "disposable income" triggering greater opportunities for inflation do not appear to be borne out by the realities. The Central Bank has initiated measures which have led to a marginally higher cost of borrowing with the banks instituting last week, a prime lending rate of 9.5 percent, up from 9.25 percent. The reality is that if the central bank needs to intervene, they will do so.

Th reduction of prime lending rate trend begun approximately five years ago, when the rate, then at a high of 18 percent, was gradually eased downward. And although the 9.5 percent lending rate is considerably below the earlier 18 percent, and still way under the 15 percent it had slipped to by May, 2001 it is, nonetheless, expected to act as a damper, however modest, on any upsurge in consumer spending.

Admittedly, however, the broad mass of people earning up to $60,000 annually will derive positive benefits from the increase in the tax allowance. Before taxpayers implement any plans they may have for the spending of additional funds expected to be released through the $60,000 tax allowance from January 1, next 2006, they need to apprise themselves of mechanisms available for savings.

In addition, it may be wiser for them to increase or initiate savings and/or investments in units, mutual funds and shares in companies listed on the Trinidad and Tobago Stock Exchange. or those who do not own homes to seek ownership of low cost housing units being constructed by Government.