Tue | Aug 22, 2017

Editorial: Revive private-sector tax group

Published:Sunday | March 20, 2016 | 3:00 AM

They may be making quiet, behind-closed-doors interventions, but Jamaica's private sector has been noticeable absent from the public debate on the Jamaica Labour Party (JLP) administration's personal income tax proposals, which, it now appears, the Government intends to widen.

Tax measures are important tools to be used by governments to underpin economic policy and guide social arrangements. At the same time, the private sector has a legitimate interest in ensuring that they are feasible, fair and equitable. That is why we are surprised at the silence.

As we understand the proposal at which the JLP settled during the election campaign, employees who earn up to J$1.5 million annually will be exempt from personal income tax. Those who earn above J$1.5 million, up to J$5 million, will continue to enjoy the old pretax threshold of J$592,800, after which they pay income tax at the standard rate of 25 per cent.

But Audley Shaw, the finance minister, has suggested that this 153 per cent rise in the threshold, which will take more than 130,000 people from the tax roll, is not the end. He told finance ministry staff: "Even as we want to start with those earning below $1.5 million, we know that those earning above $1.5 million and onward to $5 million are also stressed and we are going to be dealing with them as well."

We don't believe that Mr Shaw was being deliberately obfuscatory. But it remains unclear whether his remarks speak to a specific and separate initiative for people in those income brackets, or are an attempt to fix the glaring, and potential expensive-to-repair, anomalies that will be thrown by the Government's original policy.

The give-back, or effective salary hike, to people who earn up to $1.5 million will cost the treasury around $10.7 billion, on which it expects to claw back around $2.4 billion from those people who will now pay tax on their entire salaries - or a net loss of $8.3 billion. The administration says it will cover this with a combination of dipping into the energy stabilisation fund, growth generated by the tax measures, and collections from a tax amnesty.

 

FIXING ANOMALIES

 

These calculations, however, do not include the potential cost of fixing the anomalies and tax-rate inequities that will arise among large swathes of the 75,000 PAYE employees with salaries above $1.5 million and over $5 million. For instance, under the current proposal, an individual earning one dollar over $1.5 million will have to receive nearly $300,000 in additional pay before he/she has a take-home pay equivalent to the one whose income is at the new threshold or just below it. Similar problems arise in the near and just over $5-million bands. Some analysts, such as Joe Matalon, who headed the 2011 Private Sector Working Group on tax reform, have estimated that it would cost an additional $6 billion to $16 billion in marginal relief to fix this problem, at which the Government has scoffed. Getting the sums wrong on this is not an option. There is the potential of destabilising Jamaica's programme with the IMF, or the Government itself, if it fails to honour a full-throated election promise.

That is why business organisations should reconstitute the working group to update its review of tax policies and, if necessary, help guide the Government through a potential morass. And it need not be headed by Mr Matalon.