Mon | Aug 21, 2017

Promise made, promise kept

Published:Friday | April 15, 2016 | 4:00 AM

It was only after Antiguan Prime Minister Gaston Browne announced during his Budget speech in January that in April 2016 his government would be abolishing personal income tax (PIT) "in its entirety" that the Jamaica Labour Party crafted its election-winning no-income-tax-if-you-earn-$1.5-million-or-less promise.

The parallel is interesting. At the time he made the promise, Gaston A. Browne was the leader of the Opposition. His party won 14 of 17 seats in the June 2014 general election, making Browne the country's youngest ever prime minister. So we may say that removal-of-income-tax promises have won at least two recent general elections in the Caribbean.

What is even more interesting is that after almost two years, the Antiguan government is yet to fulfil that election promise. What was reported in the Jamaican media in January 2015 was the budget speech of the prime minister and minister of finance and corporate governance:

 

Sticking to one's word

 

"That was a major campaign promise, and my government honours its word to the people. Promise made, promise kept. Abolishing personal income tax is an important reform. Not only will it put more money in the pockets of the people so that they can save or spend more for the benefit of the economy as a whole, it will help to re-establish our country as one of the most competitive in the Caribbean and beyond."

I was in Antigua last week and obtained a copy of that budget speech. Having said "promise made, promise kept" in January; (which clearly was premature), Prime Minister Browne promised that PIT would be removed in April 2016 (this month). Just this week, the Antiguan government postponed implementation of the promise until June 2016.

In his January 2016 speech, Prime Minister Browne waxed lyrical on the desirability of abolishing income tax:

"Taxing income is destructive to investment, savings and consumption. Also, it penalises entrepreneurship." (page 29).

"The cost of collecting PIT (personal income tax); the difficulty of enforcement; and its unfairness, with most of the self-employed not paying or not paying their fair share, make it sensible to remove the PIT from our books." (page 28)

So we are convinced. But how does the government of Antigua plan to finance the abolition of PIT?

The budget speech states that "the elimination of the PIT will be partially substituted by an increase in the Revenue Recovery Charge (RRC) from 10 per cent to 13 per cent" (page 29). The RRC is applied on the CIF value of all goods imported into or produced in Antigua and Barbuda. Imports into Antigua are heavily taxed: all imports are subject to customs duties, the Antigua and Barbuda Sales Tax (ABST), RRC, and an environmental levy.

As PM Browne says, removing PIT, will free up more income for people to spend more, and since Antigua manufactures very little, this will increase the demand for foreign exchange to buy imports, putting stress on the exchange rate. More imports will increase the government's take of customs duties, ABST, RRC and the environmental levy.

Removing PIT is not an easy promise to keep, at least in the short term. The government has to create some other source of revenue to replace it, usually other taxes, often on consumption. PIT is directed at middle-class wage earners (the very poor-are-exempt because of the threshold), while consumption taxes usually hit everyone, since everyone consumes. Often, certain items favoured by the poor are exempt from consumption taxes, although the wealthy also benefit from that tax break, too.

Removing PIT will "put more money in the pockets of the people" (i.e. the pockets of the middle class who used to pay PIT); but increasing RRC will take more money out of people's pockets, but a different set of people - namely the poor - who don't usually pay PIT. You can say that such a strategy will be a transfer of wealth from the poor to the rich.

 

Social security

 

After Antigua, I travelled to St Kitts & Nevis, which abolished PIT in 2010. The government financed PIT removal by introducing a value-added tax (VAT) of 17% and by increasing social-security contributions: those earning EC$1,000-$6,500 pay 3.5% (3% previously) of gross wages; those earning EC$6,500-$8,000 pay 10% (8% previously); and those over EC$8,000 pay 12% (10% previously).

If you don't pay one way, you pay another.

The citizens of both Antigua & Barbuda (US$12,640) and St Kitts & Nevis (US$13,330) boast more than twice the per-capita income of Jamaicans (US$5,140), which means they can afford higher consumption taxes, while their states are burdened with much fewer poor people to support through the social-safety net.

I am sure that the Jamaican Government will find a way to eliminate income taxes for persons earning under J$1.5 million/annum, and keep its campaign promise, but we all (especially the poor) will have to pay more in consumption taxes. Brace for it!

- Peter Espeut is a development scientist and environmentalist. Email feedback to columns@gleanerjm.com.

 

Correction:  (Updated 10:41 a.m.) The Antiguan government postponed implementation of the income tax promise until June 2016.