Tue | Sep 26, 2017

Editorial: Bankable numbers, please

Published:Sunday | March 6, 2016 | 3:00 AM

In his mostly conciliatory, inclusive and uplifting inaugural address last Thursday, Prime Minister Andrew Holness pointedly declared the new Government's intention to implement, almost immediately, its campaign promise to eliminate personal income tax for people who earn up to J$1.5 million annually. His presumptive finance minister, Audley Shaw, had previously said it would happen in his first Budget offering.

This newspaper, like large swathes of the private sector, urges caution on the administration on how it proceeds, taking time to ensure that it has got its sums right and that it has worked through the too many obvious kinks in the policy, lest it put Jamaica's fiscal consolidation project out of kilter and derail the country's International Monetary Fund (IMF)-backed economic reforms of the past four years.

In other words, Mr Holness, Mr Shaw, and their economic advisers must be clear about how they will pay for the tax give-back with hard, bankable numbers and not merely theoretical assumptions. Further, the new tax arrangements must be equitable to all workers, not undermine labour productivity, or create management chaos for firms.

We expect that some of these arguments will be made to Mr Holness and his economic team this week when they meet with the IMF's Jamaica mission chief, Uma Ramakrishnan.

There is no doubt that the reform programme to cure four decades of inappropriate economic policies that delivered anaemic growth and an unmanageable national debt has been painful, although necessary. It is understandable, in the circumstances, that the tax-relief offer by Mr Holness' Jamaica Labour Party was attractive to the electorate.

 

WORKABLE PROPOSAL

 

The questions now faced by the Government are whether the proposal is workable, as pitched, and whether the administration has placed itself in a fiscal and political dilemma. The plan, in its last formulation, says that people earning above J$1.5 million, capping off at J$5 million, will benefit from the current exemption of tax on J$592,800 on their incomes; those earning above $5 million will lose the exemption and pay income tax at the standard rate of 25 per cent on all their earnings.

This give-back will, on the face of it, cost $10.7 billion, but a net $8.5 billion, assuming an additional take of $2.5 billion from earners above $5 million who will lose their exemptions. The Government says it will pay for this by dipping into the petroleum stabilisation fund, collecting tax arrears, and the growth that will come from increased consumption driven by the tax give-back.

Perhaps! If that was all.

What has not been, up to now, seriously or effectively challenged is the analysis by Joe Matalon, the private-sector boss and tax researcher, of the inequities in the proposal and the potential cost of fixing them - either by firms or the Government. For instance, under the plan, someone earning $1.8 million will have an income tax bill of $301,800, or a take-home pay - before other deductions - of $1,498,200, or nearly J$2,000 less than the person who earns J$1.5 million. This kind of anomaly exists across the J$1.5-million to J$1.8-million income bands. A fix will require either big additional wage costs by firms or marginal relief by the Government.

Mr Matalon has offered calculations on the latter, assuming six bands of marginal relief, ranging from 25 per cent to 50 per cent for people in the over J$1.5m to J$5m, and above J$5 million. The fiscal hole to be covered, in these scenarios, ranges between J$14.6 billion and J$28 billion. Over to you, Mr Holness.