Thu | Jan 18, 2018

Economist warns tax plan could hurt in the long run

Published:Friday | April 8, 2016 | 12:00 AM

Economist warns tax plan could hurt in the long run

Neville Graham

Business Reporter

The Government's tax relief plan, which waives income tax on salaries below $1.5 million, may not have the multifier effect expected on the economy, warns economist Dr Terence Yhip.

"It will lead maybe to some spending, but, in the long run, the multiplier could be negative or zero, or slightly positive. That is to say, after two to three years, you allow things to unwind," said Yhip, visiting fellow at the Department of Economics at the University of the West Indies, Mona, at a forum last Wednesday at the Hugh Lawson Shearer Trade Union Education Institute.

Yhip supported his assertion by an examination of what he calls, "the many holes in Jamaica's multiplier effect", while noting that the effect of any increase in spending from the tax-free income will be dampened by a lack of productive capacity in the manufacturing sector, in the first instance.

"Jamaica is not a manufacturing country. It is not as if you could spend a dollar in a regular industrialised economy where people spend and factories produce. In Jamaica, a lot of it leaks out as imports," Yhip reasoned.

Public will pay

He warned that if his prediction comes true, then Jamaican workers will be made to pay dearly for any shortfall as Government is bound by the dictates of the IMF programme and the need to maintain a good credit rating.

"If after all of this experiment it doesn't work out ... say you've done away with 20-odd billion dollars in tax revenues and it doesn't work? Where does the Government collect that from?" he asked. "We can't just print money in this business; it has to come from somewhere. There are no free lunches, as they say in economics."

Yhip adds that what could make the situation worse is the continued depreciation of the Jamaican dollar against its counterparts, while noting that, based on recent history and the projected rate of depreciation, the Jamaica dollar is likely to hit $130 to the USD by the end of the year. The local currency is now trading at $122.

The fall in the value of the JMD would have negative consequences for Jamaica's debt-servicing arrangements, which, in turn, would create a knock-on effect on the amount of taxes collected and how such taxes are spent, the academic said.

"We're creeping up to $130. Every time the dollar depreciates it adds to the debt-to-GDP ratio in Jamaican terms. Right now, you have $14 billion in US debt and there is about another one billion in short-term debt in a year's time. Every time the dollar weakens, that debt in Jamaican dollars increases," he said.

Government is proposing to eliminate income tax requirements for all persons earning below $1.5 million per year and shift the burden of paying taxes to higher-wage earners.

There is ongoing debate about the cost of the programme, the likely revenue shortfall and the funding sources to offset the lower taxes.

The new Holness administration had initially planned to implement the plan on April 1, but has pushed back the date, saying the fuel tax on which it planned to draw for around $9 billion of part financing had already been used up in the last fiscal year.