Our tax dilemma
The Gleaner of March 11 carried a report that "the Ministry of Finance and Planning has admitted that tax revenue targets have not been achieved in the last seven years". While this is true, the impression may be given that this is a departure from the norm. The fact is that revenue targets have been missed all but only three times in the last 20 years - 1994-95, 1995-96 and 2007-08.
It is to be assumed that, in imposing new taxes and setting revenue targets, the Government takes the best advice from its tax authorities, especially those in the field and those involved in auditing and compliance efforts who know the elasticity on the ground better than anyone else. Robust compliance efforts are frequently mounted. Why then do we almost always come up short?
We often hear the refrain that we have reached our 'taxable limit'. What is that limit? Jamaica's tax revenues as a percentage of GDP have fluctuated between 23 and 27 per cent over the last 20 years. They have remained below 25 per cent for the last 10 years but this still places us above most other Caricom countries.
There is no accepted benchmark for these ratios since the amount of taxes we pay has to be weighed against the services we receive. In Denmark, for example, tax revenues exceed 50 per cent of GDP but every Danish resident enjoys a raft of benefits, including free first-class health care and free first-class education to university level, plus a basic pension upon retirement. In our case, our taxes must be considered in terms of not only the services we receive but also the huge debt that we must service and repay.
Some important lessons can
be learned from studying the behaviour of the revenues over the last two decades. Most of our revenues come from taxes that are price or value based, such as incomes, consumption and customs and, therefore, under normal circumstances the tax take is expected to move generally in line with inflation. Importantly, there have been 14 new tax packages implemented over these 20 years that, cumulatively, would have almost doubled our tax
revenues over and above inflation (96 per cent, to be precise). However, the real increase in revenues after adjusting for inflation is only 34 per cent. What this indicates is that while tax collections are ahead of inflation they do not reflect the level of enhancement that the various tax measures introduced over the period were designed to produce. Something, evidently, had to give, and has given!
The Government and others speak of the need to go after tax dodgers. Dr Trevor Munroe of National Integrity Action recently pointed to the fact that, "of the entities with $1 billion in sales revenue, at the end of the 2013-2014 fiscal year, 27 per cent filed no returns and 21 per cent (presumably of those who filed) paid no corporate income tax". He could also have mentioned those with less than $1 billion in sales revenue which are similarly non-compliant. The suggestion here is that the unpaid taxes are stashed away in a bank account somewhere or have been converted into assets that ought to be liquidated and the taxes paid up.
Undoubtedly, there are taxpayers who are delinquent and treat their tax obligations with scant regard but there are many who would be unable to keep their businesses going or pay for their children's college education if the taxes they owe had been paid over. As indefensible and unfair to the treasury as that may be, it is the harsh reality. Market economy purists will argue that they should be booked and forced out of business and the student taken out of college, thus creating space for another business to start up or another student to enroll, but life doesn't necessarily work that way. The Government showed some appreciation of this dilemma when two years ago it enacted legislation to effectively write off some $230 billion in unpaid taxes that for all practical purposes were uncollectable.
The deeper issue, however, is whether we have indeed reached our taxable limit. Contemporary economists speak of the Laffer curve which demonstrates that increasing tax rates beyond a given point not only has a counterproductive effect but also makes tax collection considerably more difficult. In our case, the data suggests that even when heavy new taxes are imposed the share of GDP that is collected remains relatively constant. The Government may collect more from that set of taxes but is likely to find that it collects less in other areas as people are forced to adjust their engagement in taxable activity.
All of this has significant implications for the Govern-ment's economic programme which originally projected an 11 per cent average annual increase in revenue collections through to 2019/2020. This will be difficult to achieve without appreciable economic growth and improvement in people's purchasing power, especially as reduced inflation will depress the buoyancy effect on revenue collections. It appears that the Govern-ment has recognised this as in the most recent IMF review of our economic programme it has ratcheted this target down to 9 per cent but it has commensurately reduced the projections for expenditure on programmes with obvious implications for critical but severely underfunded sectors such as health, education, security and justice. It has made a much sharper 37 per cent cut over the period in projected capital expenditure, which is where Government
contributes most directly to
These are among a number of adjustments that have been made to the programme targets agreed with the IMF that have attracted little attention. It places in jeopardy other critical GDP-related benchmarks. We speak, for example, of reducing the national debt but what the programme contemplates is not a reduction in the debt per se but in the debt-to- GDP ratio. The programme envisages that the debt will, in fact, increase by $450 billion during the four-year life of the Extended Fund Facility and $600 billion by 2020. So it is the GDP that must move up (aka economic growth), not for the debt to move down. And the interest costs and the repayments we have to continue to make on that debt, plus the additional expenditure that we need desperately to make in health, education and other critical sectors must ultimately come from the taxes we pay. For this reason, economic growth that expands our taxable capacity must be seen not as a hoped-for by-product of the current economic programme but rather an essential ingredient for its success. The much-called-for 'growth strategy' ought not, therefore, to be seen as 'the next phase' of the programme. It ought to be what defines the programme in the first place.
The tough challenges are not yet behind us; many are still to
come. It is like running the
hurdles with each set being somewhat higher than the last and with our energy rapidly dissipating. The choices facing the Government are by no means easy. It is a truism that the more taxes the Government extracts from the people, the less is their purchasing power, an indispensible stimulant for economic growth. We delude ourselves if we believe that the poor and struggling can be insulated and that taxes can be targeted at the rich with fat bank accounts. Taxes don't stop where they are posted. They percolate to the very bottom - the ultimate consumers of goods and services whose purchasing power determines the country's level of economic activity.
I once asked President Ricardo Martinelli of Panama, under whose watch the economy recorded annual growth of more than 7 per cent, what accounted for that success. He replied "One word. Taxes! I cut taxes!" That option may have been open to Panama since its debt was less than 40 per cent of GDP. Our situation severely narrows the choices that are open to us. We genuinely need an informed, non-partisan discussion on what those choices are and how we should approach them. I will attempt to explore these in a subsequent article.
- Bruce Golding is a former prime minister of Jamaica. Email feedback to firstname.lastname@example.org