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Commentary: Some truth-telling about tax on wages

Published:Sunday | March 1, 2015 | 12:00 AM
Everald Dewar

Someone once said there are two types of taxpayers in Jamaica: those who operate under the 'pay as you earn' or PAYE system, and those who 'pay as you like'.

The PAYE group are those wage workers selling their labour to the 'capitalist'. To the government, workers plying their services for a wage are at the highest in the pecking order for revenue earnings.

As the majority of Jamaican wage earners are descendants of slaves, shut up within our bones is defiance against any perceived exploitation. This defiance is towards our taskmasters as well as our 'tax master'.

A distinction must be made between a wage tax and a tax on income such as profits and investments. The largest group of taxpayers in Jamaica - approximately 86 per cent - are those who earn only wage income and have all their income taxes withheld at source.

The ongoing complaint of the wage earner is that taxes on wage are far too high. But this can mean many things, such as dissatisfaction with the public services being provided.

High tax rates were always the Jamaican experiences since the 1970s. For instance, in 1977, the top rate of tax on income was 80 per cent. At that time, in addition to the personal allowance, there were tax credits - aimed at eliminating hardships - available on almost everything. There was also an overtime work-wage preferential treatment facility that was supposed to act as an inducement for employers to encourage increased work effort.

Tax thresholds

By 1986, these tax credits were replaced by a standard tax-free threshold of $8,580 per annum and a flat rate of 33.33 per cent, replacing the progressive rates. All fringe benefit type allowances then becomes taxable with some exceptions such as transportation, housing and uniforms allowances.

The perception was that there was widespread avoidance of income tax in the employment sector, through the form of non-taxable perquisites and allowances.

The preferential treatment of overtime pay was said to be abused and used as a loophole where the employer, while reducing his wage bill, bought goodwill from his workforce by reporting overtime on their behalf where there was none. It, too, was eliminated.

The tax threshold of $8,580 has grown over almost three decades, and on January 1, 2015, it increased to $557,232 per annum from $507,312. The increase in the threshold means that the corresponding tax-free portion available to individuals has increased.

Even with the Minimum Business Tax, the 30 per cent Employment Tax Credit has effectively reduced the rate of corporate income tax from 25 per cent to 17.5 per cent.

Increase for workers

But to the downtrodden wage earner, the wage tax has increased with the threshold. Let me explain.

While the income tax rate of 25 per cent is applicable to the wage tax, it is important to recognise that there are other charges imposed on essentially the same income tax base. These are a mixture of forced savings and outright taxes, such as the education tax and contributions to National Housing Trust (NHT) and the National Insurance Scheme (NIS). They raised the marginal rate of wage tax from 25 per cent to as much as 30 per cent on some types of workers.

The only way the PAYE taxpayer will ever equate to 25 per cent is if the education tax and NHT contributions were eliminated or if the income tax rate for PAYE was reduced to 21 per cent. Whatever savings are given by the threshold are effectively eaten up by the statutory payments. In effect, there is no tax threshold.

Waged taxpayers are of the perception that only the PAYE sector is effectively taxed and self-employed people are freer to disguise their income than employees. This gives incentive to many to migrate from the formal to the informal sector of the economy, thus encouraging tax evasion and tax avoidance.

There is nothing for the wage earner in the recently passed Fiscal Incentive Act, as he/she received no tax break. In fact, the wage worker has seen a slow erosion of existing tax reliefs and allowances, leaving them feeling victimised.

Up to recently, Tax Administration Jamaica proposed taxing the very lunch employees were receiving from their employers. My god! Where will it stop?

Most of us take it for granted, but with the removal of the 'rent-cheque' benefit went the last remnant of grace for the employee with the monstrous edifice it brings in its trail.

n Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.