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Editorial: Parsing Mr Shaw on tax reform

Published:Wednesday | March 30, 2016 | 3:00 AM

Audley Shaw may have begun to appreciate what tax experts have explained since the Jamaica Labour Party (JLP) unveiled its income tax plan ahead of last month's general election: that, as framed, it would endanger the country's fiscal stability and its economic reform agreement with the International Monetary Fund (IMF).

The Government, for which Mr Shaw is now the finance minister, remains committed to raising the income tax threshold by 153 per cent, to J$1.5 million. Further, as he told private-sector leaders yesterday, the administration will also smooth out the anomalies that will arise for workers over J$1.5 million and up to J$1.8 million.

That, on the face of it, doesn't indicate a rethink on the part of the administration, especially given the broader range of fiscal issues highlighted by the analysts who have critiqued the Government's tax plan. Except that Mr Shaw said more, which, when parsed, suggests that, faced with the reality of implementing the policies, the Government is now being forced to give them thoughtful consideration.

"We are assessing a number of options to mitigate the fiscal impact of this measure, and we remain confident that it can be accommodated within the context of broader tax reform," Mr Shaw told members of the Private Sector Organisation Jamaica (PSOJ). Note the phrase "within the context of broader tax reform".

 

INCOME TAX RATE

 

While the Government's intended policy would make income up to J$1.5 million free of income tax, anything above that amount, and up to J$5 million, would have the existing tax-free threshold of J$592,800 and pay at the standard income tax rate of 25 per cent. People earning more than J$5 million would have no tax-free allowance.

On the face of it, therefore, the proposal would be a net cost to the treasury of around J$8.5 billion: the J$11 billion it would forgo on salaries up to $1.5 million, minus an additional J$2.5 billion it would claw back from people earning above J$5 million a year. Mr Shaw hoped to cover that gap by using some of the income from a tax on petrol, which was to be put aside for energy-related projects; collections from outstanding taxes; and from the economic stimulus of the giveback.

But the policy framers didn't do all their sums of the cost anomalies and inequities, which Mr Shaw acknowledges will require smoothing out. Indeed, under the proposal, as exists, it would require some to earn above J$1.8 million before earning a dollar more in take-home pay than the person earning J$1.5 million who no longer pays income tax. Anomalies will similarly arise for earners at the J$5-million band, when those below the threshold get a near-$600,000 tax break, but those above pay 25 per cent on their entire income.

Normally, governments fix such anomalies with marginal relief, which, by some estimates, depending on the extent of the cushion, could cost between J$6 billion and J$17 billion, in addition to the $8.5 billion acknowledged by the Government. Mr Shaw now says the Energy Stabilisation Fund should have been formally set aside, but was absorbed into the Consolidated Fund. That shouldn't matter if it is accounted for and will continue to flow.

The bigger issue is the cost of the proposal and whether it is affordable, in its current form, given Jamaica's fiscal target under its IMF programme, of a primary balance of seven per cent of GDP. In that context "broader tax reform" may be interpreted as a road away from a fiscal cliff.