Wed | Sep 20, 2017

Editorial | Pragmatism triumphs in tax plan

Published:Sunday | May 15, 2016 | 5:00 AM

Pragmatism has happily prevailed. The Holness administration abandoned its catching, but obviously unworkable personal income tax policy for one that is less dreamy but implementable. We know how it will be paid for: with new taxes.

But even at this late stage, it remains clear that there is still need for order and discipline in policy formulation in the Government. Last Friday, the day after the Government unveiled the J$13.8-billion tax package from which it would fund the new plan, Finance Minister Audley Shaw announced that increases in the special consumption and ad valorem taxes on heavy fuel oil, used as fuel in power plants, won't apply to the electricity sector.

That will be good news to firms and household consumers of electricity, who feared higher prices. The exemption, though, appears to have been a last-minute development. Not only did Minister Shaw not announce this decision during his parliamentary unveiling on Friday, but neither Kelly Tomblin, president of the monopoly electricity transmission and distribution company, nor Aubyn Hill, economic policy adviser to Prime Minister Andrew Holness, appeared to be aware of it when they participated together on a radio discussion programme later on Thursday. Moreover, it is not yet clear what will be the case with the taxes placed on liquefied natural gas (LNG) when that fuel comes into use for power generation later this year.

Whether or not that is indeed the fact, on the face of it, the eventual decisions have characteristics similar to those that attended the creation of the tax programme: the appearance of policy formulation on the fly.

 

INCREASED CONSUMPTION

 

On the positive side, if it works, which we hope is the case, the policy will lead to increased consumption of domestically produced goods and services, helping to fuel growth. But the programme, or a key element of its financing, may face potential headwinds if recent upticks in global oil markets are signals of a sustainable increase in prices.

In this context, it is important to recall the basis on which the tax proposal was initially settled on and how it was to be financed. The income tax threshold was to increase to J$1.5 million - from the current J$592,800 - for people earning up to J$5 million, retroactive to April 1. Earners of more than J$5 million would have no exemption and pay at the standard rate of 25 per cent. Implementation would require no new taxation and would be paid for from existing resources.

There were, however, two problems. The easy one was the uncertainty of achieving some of the expectations. More problematic was the fundamental flaw by the governing Jamaica Labour Party in crafting tax policy: It did not think about the need for equity and the anomalies that would arise if it attempted to implement the original plan.

Fixing the anomalies would have resulted in an overall cost for the policy of up to J$27 billion. The upshot is that the J$1.5-million threshold will apply across the board, but employees will get 44 per cent of the promised increase for nine months this fiscal year and the remainder in a year's time. Tax on fuel at the pumps has been increased by 29 per cent, with a J$7-per-litre jump. This will affect transportation costs and might have a knock-on effect elsewhere in the economy.

Critically, however, by paying for the policy with increased taxes, the Government seems to have secured its fiscal programme and Jamaica's agreement with the IMF. Hopefully, the programme will be self-sustainable going forward.