Sun | Aug 20, 2017

Editorial: Get the tax working group going

Published:Thursday | March 31, 2016 | 3:00 AM
Shaw

Audley Shaw, and by extension the government, has done what this newspaper suggested they do all along: ask the private sector for help in sorting out an obviously muddled tax policy. And they should. In that regard, the Private Sector Organisation of Jamaica (PSOJ) should urgently reconstitute its working group on tax reform.

In the meantime, William Mahfood, the PSOJ's president, must pointedly tell the government that they must eschew hubris and shelve their "other plan" for financing the income tax give-back until the "broader tax reform" Mr Shaw spoke of is devised and clearly bankable. Time, in this regard, is of the essence, given the finance minister's intention to finalise the scheme for financing the policy "this week", by which we presume he means during the retreat of the Cabinet to agree on the government's budget for this fiscal year.

The dilemma facing the government is the consequence of policy development on the fly. During the campaign for the February general election, the Jamaica Labour Party (JLP), then in opposition, proposed, if elected, to raise the income tax threshold by more than one-and-half times to J$1.5 million.

When discerning people did the sums and pointed out that that would cost over J$30 billion, destabilise the fiscal accounts and threaten Jamaica's IMF-supported economic reform programme, the policy was adjusted. People earning up to J$1.5 million would be free of income tax, but above that level, and up to J$5 million, the existing tax-exemption amount of J$592,800 would continue and the standard tax rate of 25 per cent would apply. Above J$5 million, the 25 per cent tax would be on the entire income.

The administration's estimated the net cost to the treasury of its plan at around J$8.5 billion - the value of the give-back, minus an estimated J$2.5 billion additional take from people who earn over J$5 million a year. But those sums failed to take into account the anomalies and inequities inherent in the proposal, which Mr Shaw now says will have to be smoothed over. For instance, someone earning J$1.5 million, and without an income tax obligation, would take home over J$200,000 more pay than a worker whose taxed salary is only J$100,000 more. This anomaly only evens out only when the person's salary passes J$1.8 million. But the problem arises again on the fringes of the J$5 million band.

 

NO CONCESSION

Joe Matalon, the former president and the PSOJ, who headed the organisation's tax reform working group in 2011, was ridiculed for pointing out it would could cost, apart from the J$8.5 billion, between J$6.5 and J$17 billion in marginal relief to fix this problem.. There is yet no concession on this analysis.

Mr Shaw, however, complained that a tax on petrol with which he hoped to finance the tax-give back, was not ring-fenced by their previous administration, but was accounted for in the Consolidated Fund. So, he now has to seek an alternative. It should matter not into which fund the petrol tax is put, so long as it is accounted for and continues to flow. It is, nonetheless, an opportune development on which to blame a review of the government's ideas and the embrace of broader reforms, which is where, according to Mr Shaw, "we welcome the assistance of the private sector".

Four years ago, the working group's proposals included a tax-free exemption for income up to just under $500,000; a tax rate of 15 per cent on earnings up $1.23 million; and the standard 25 per cent, thereafter. This would be supported by a five percentage point reduction of the general consumption tax and its application to a wider range of products, plus direct cash subsidies to the most vulnerable. Tweaking is possible.