Mon | Sep 25, 2017

Editorial | Time for clear debate on tax policy

Published:Sunday | March 12, 2017 | 3:00 AM

There are many things in Audley Shaw's tax package that will stir substantial, raucous even, debate. But as significant as this will be, it will unlikely include, except for fleeting, politically inspired references, serious discourse on the fundamental shift in taxation policy that underlines Mr Shaw's effort to raise an additional J$17.5 billion in revenue during the coming fiscal year.

Part of the problem, perhaps, is that while the Holness administration has embraced this move to indirect taxation as key policy, it initially stumbled on the idea as an election vote-catcher, rather than it being part of its underlying economic philosophy. So, in the year since the Jamaica Labour Party won the government mostly on the inspiration of its income tax give-back promise, it hasn't seriously articulated the issue in broader economic terms.

The People's National Party, shell-shocked by its defeat, is yet to offer a credible or effective counter-narrative to the policy, or of how it may be more effectively employed in Jamaica's fiscal and social circumstances.

Nearly 83 per cent of the new money that Mr Shaw hopes to raise will be for offsetting the $14.2 billion in revenue that was lost with his April implementation of the second tranche of a two-tiered hike in the threshold for personal income tax to J$1.5 million. In Opposition, Mr Shaw's party, having undercounted by as much as 60 per cent, insisted that it could implement the give-back without offsetting taxes. As it turned out, they have, over the two fiscal years, including the coming year's package, been forced to gin up approximately J$30 billion to cover the obligation.

 

Higher taxes announced

 

Mr Shaw announced higher taxes on petrol, electricity bills, alcohol and tobacco, while an J$11.4-billion extraction from the National Housing Trust and nearly J$4 billion in additional income from a revised property tax regime will help him meet the seven per cent primary surplus required under Jamaica's agreement with the IMF.

Politically, Mr Shaw and his party can tout that raising the tax threshold will, in one sweep, wipe over 397,000 people, or approximately 85 per cent, from the income tax roll. Put another way, only 72,000 people, or less than seven per cent of an employed labour force of 1.1 million, will be on the PAYE system. Surprisingly, the Government projects approximately $70 billion from personal income tax in 2017-18, an amount similar to the pre-reform level, although flows for this fiscal year that's about to close are nearly J$20 billion behind the amount for

2015-16.

In an economy with high levels of informality, brazen tax evasion, and a tax-collection mechanism that is inefficient, indirect taxation is usually easier. Petrol stations and large firms can't easily hide the consumption taxes they collect. There is a narrative, too, that removal of income tax gives individuals choice in how they spend their money and generally leads to consumption that drives growth. With a diminishing income tax base, this may bolster the argument for the removal of the tax altogether.

But indirect taxation, especially when they are applied to basic consumerables, or products that have an input therein, are likely to be regressive. Poor people consume more of their incomes than rich ones do. So, there is a potential for harming society's most vulnerable and widening the divide. That's why a sensible discourse on the tax policy is urgent.