Sun | Aug 20, 2017

Editorial: Be careful of tax promises

Published:Wednesday | March 16, 2016 | 3:00 AM

While we understand that the government may feel itself obligated to quickly fulfill its campaign promises, especially the one on personal income tax, we suggest to Prime Minister Andrew Holness and his finance chief, Audley Shaw, to avoid the haste and make sure that they have got their sums right and that what they have promised is what is possible.

In other words, Mr Shaw shouldn't feel himself irrevocably bound by the undertaking to remove in the next budget, to take effect in the fiscal year that starts April 1, personal income tax for people who earn up to $1.5 million annually. For, as the finance minister will have appreciated by now, the proposal as configured, is as fraught with problems as to make its implementation in its current form unwise. And as this newspaper so often warns politicians, what is worse than creating bad policy is its implementation.

Should Mr Holness and Mr Shaw fear a political backlash because of any delay, they can blame the postponement on Mr Shaw's promise to provide relief to people earning over $1.5 million and up to $5 million, which is an attempted fix to anomalies that this newspaper, and others, warned would result from the plan as now structured.

The obvious problem with what's on offer is that it is policy developed on the fly, rather than having been subject to thorough, hard-nosed analysis before promulgation.

The initial intention, it seemed, was to raise the personal income tax threshold for all workers to $1.5 million. That would have cost the treasury over $30 billion. The proposal was adjusted to apply the exemption to people who earn up to $1.5 million. The current threshold of $592, 800 would remain for people who earn up to $5 million. Above that income the standard income tax rate of 25 per cent would apply to entire earnings.

 

Anomalies

 

On the face of it, the cost of the give-back would be under $11 billion, but with the claw-back from people who earn over $5 million, the net loss to the Government would be around $8.5 billion. Then there are the anomalies. For instance, someone who earns, say, $1.6 million, under the proposed arrangement, would have an income tax bill of $251,800 and a take-home pay, excluding other deductions, of $1,348,200, or $151,800 less than the person who earns $1.5 million.

Mr Shaw has promised a fix, which by independent estimates, could cost an addition $6 billion to $17 billion, without a clear indication of how it might be funded and against the backdrop of the IMF's warning that "fiscal measures ... be consistent with a primary surplus target of seven per cent of GDP in 2016-17".

Mr Shaw has to be wary of derailing Jamaica's agreement with the Fund.

There is another matter that should concern the government. Income tax calculations are done on a calendar year basis. Implementation of a new scheme at this time would be chaotic for firms, which would have to reorganise their payroll system. Or, they might be busy re-negotiating salary contracts downwards for staff in the out-of-the-loop pay bands.