Wed | Aug 16, 2017

Editorial: When Mr Shaw speaks!

Published:Wednesday | March 23, 2016 | 3:10 AM

Audley Shaw's delay in presenting a Budget for the new fiscal year that starts April 1 is quite understandable. For Budgets are, in part, tools of economic policy, so the new administration obviously wants the document to represent its fiscal priorities, rather than those of its predecessor.

Nonetheless, the finance minister will appreciate the deepening anxieties over some of the Government's proposals, which require an urgent and transparent outline of his spending programme, in particular income-tax reform.

Should Mr Shaw doubt this, he need only consider the observations of O'Neil Grant, the president of the civil service union, about the fear of some of his members that their previously agreed three per cent salary hike will saddle them with income tax liabilities beyond the value of the pay increase.

The problem, though, is confined to a handful of civil servants who will be pushed over the proposed J$1.5 million a year income-tax threshold. The new tax programme, at least as it was enunciated, is potentially chaotic and costly to fix, and, even if fudged for a while, could weaken the country's hard-won macroeconomic stability.

The Government's promise, made in the recent election campaign, is to increase by 153 per cent, to J$1.5 million, the amount of money Jamaicans have to earn before being taxed on their income. But that threshold doesn't apply to all earners. People earning over J$1.5 million, up to J$5 million, will get the old exemption of J$592,800 and pay income tax at the standard rate of 25 per cent. People earning over J$5 million will be taxed on their entire income.

The proposal carries a net cost of around J$8.5 billion - $11 billion in give-backs, minus what will be clawed back from people who will no longer have exemptions. The administration says it will cover the cost by dipping into the Energy Stabilisation Fund, which is a tax on petrol; by collecting outstanding taxes; and from revenue generated by the stimulus associated with the give-back.

 

ANOMALY

 

Except that the policy, as announced, creates anomalies in the tax system. A worker who earns $1.5 million, excluding other deductions, will take home all his pay. But someone earning single dollar more will have an income tax bill of $226,800. In this pay bracket, the anomaly of the person with the nominally higher salary taking home less pay continues until his income reaches $1.8 million. Similar problems arise on the margins of the $5-million salary range.

Such inequities could undermine labour productivity, as was alluded to by the civil-service union's Mr Grant. Its implementation at midstream will cause chaos for firms and their payroll departments.

This can be fixed easiest by the Government providing marginal relief to affected PAYE workers. But this could carry an additional cost of between J$6.2 billion and J$17 billion, depending on the level of marginal relief provided by the Government, if it goes that route.

Or, put another way, the total bill for the reform proposal would be between $14.6 billion and $27.7 billion. That, in the context of Jamaica's agreement with the International Monetary Fund, is unaffordable, in the absence of new tax package or widening the reach of the general consumption tax.

Mr Shaw should clarify his ideas when he addresses Parliament next week and, perhaps, ask the private sector for help in working through this dilemma.