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Editorial: The Cabinet’s PAYE dilemma

Published:Sunday | March 27, 2016 | 12:00 AM
Prime Minister Andrew Holness

When Prime Minister Andrew Holness leads his ministers and their key technocrats into a brainstorming retreat next weekend, they must have one overriding priority - to avoid anything that threatens to undermine Jamaica's macroeconomic stability and derail the country's current economic support agreement with the International Monetary Fund.

That is likely to mean a radical rethink and overhaul of their proposed reform of personal income tax, which would probably mean a delay in its implementation. That, we appreciate, would be a difficult pill for the Government to swallow given that the income tax giveback and its launch at the start of the new fiscal year were a crucial and, perhaps, winning plank in the Jamaica Labour Party's election campaign.

But the policy, as currently modelled, is unfair, inequitable and fiscally unsound. While the Government may be able to fudge with it for a while, it will, without substantially more revision, ultimately become unstuck.

The Government's proposal is to exempt personal income tax payments for all workers who earn up to J$1.5 million a year, removing around 130,000 people from the PAYE roll. But everyone else, up to those who earn J$5 million a year, would receive the existing tax-free exemption of J$592,800 and pay a standard rate of 25 per cent on the rest of their income. People who earn anything above J$5 million a year would be denied exemptions and, therefore, pay the standard rate on their entire income.

The net cost of his plans is around J$8.5 billion, which Mr Audley Shaw, the finance minister, says he will extract by dipping into the Energy Stabilisation Fund, which comes from a tax on petrol. The theory is that this money will be recovered by the collection of back taxes and also from taxes generated from the stimulus of the giveback. The last two are not assured, and, if they happen, carry a time lag.

 

Implementation timing

 

The proposed timing of the implementation also poses a problem. Income tax calculations or assessments are done on a calendar, rather than a fiscal, basis. So, an introduction will be chaotic for firms and their payroll departments. That, however, is not the worst of the matter.

Of greater concern are the other potential costs which the Government's policymakers appeared not to take into account in their calculations - for fixing the inequities inherent in this proposal. For instance, while, all things being equal, someone earning $1.5 million gets to take home all his pay, the employee with a dollar more of salary would have a tax bill of nearly $227,000. And an employee will have to reach a salary in the range of $1.8 million before his net pay is a dollar higher than the one earning $1.5 million. Similar anomalies arise in the margins of the $5-million mark.

 

Declining productivity

 

Left unaddressed, such anomalies demotivate workers and lead to declining productivity, which is little wonder why the civil-service union has called for a lowering of the threshold by a third and for the application of the new rate across the board. Unless the Government expects the private sector to take up the tab for the anomalies, such gaps are usually bridged by the offer of marginal relief - adjustments to ensure that the tax paid is not more than net income earned above tax threshold, as well as to maintain equity between taxpayers.

The cost of this fix could, credible estimates suggest, be between an additional $6 billion and $17 billion, which could mean higher taxes. The Government, in the event, could consider widening the net of the general consumption tax, increasing the tax on petrol, or even consider a tax on financial transactions, which it once ridiculed.