Dedicated taxes: a very bad idea
The recent decision by the National Housing Trust (NHT) to purchase property on which the Outameni Experience attraction is located has sparked much debate and righteous indignation in some quarters.
We have seen non-elected groups from the private sector, civil society and non-governmental organisations attempt to exercise political power in the composition of at least one government board. The issue has been highly emotional, generating more heat than light.
Some people cannot understand why there are Jamaicans who need houses and have contributed to the National Housing Trust (NHT) for years, yet they have not been able to obtain a house, while the NHT is awash with money. Unfortunately, the fundamental issue which this episode has exposed has been totally ignored.
Jamaicans have been accustomed to think that the reason why certain things are not in place is that there is a lack of money. That if we only had the money, all our desires would be met. This is not always the case.
Any sports fan who has ever shown up at the National Stadium with the price of admission in his pocket, and has been unable to gain access, will realise that money is not the only determining factor. The National Stadium has a given capacity, and when that capacity is reached, it can accommodate no more spectators, irrespective of how much money they have in their pockets.
MATTER OF CAPACITY
The Jamaican economy has a certain capacity for the delivery of houses. While this capacity is not fixed, as is the number of seats in the stadium, the rate of increase is certainly constrained. The number of firms capable of executing very large-scale projects, and the number of skilled craftsmen - builders, carpenters, tilers, plumbers, etc. - limit the capacity of the country to build houses.
If the NHT tried to use all its resources on the construction of houses, even if it were going to give these houses away for free, it would be unable to do so; there is a capacity constraint on the supply side. Once people are required to buy the houses, then another set of constraints on the demand side comes into play - the ability of buyers to service their mortgages.
Should the NHT give mortgages at a rate faster than the capacity of the country to deliver additional houses, this additional money would simply fuel a rise in the price of houses. Prices would rise until the number of houses people are able to buy is matched by the number being built. We could, of course, import firms and workers to build more houses, thus breaking the local capacity constraint, but this would have to be done at world prices, i.e., these houses would cost more to build.
Part of the discourse surrounding the NHT is that funds it has are held in trust on behalf of contributors. This is not totally accurate. The NHT is funded by a five per cent tax on the total wage bill of the country. Employees contribute two per cent of the wage bill while employers contribute three per cent. Employees, therefore, contribute 40 per cent of the funds flowing into the NHT and employers contribute the remaining 60 per cent.
Employees who contribute to the NHT and are not current recipients of benefits from the NHT can obtain a refund of their contributions (with interest) after a period of seven years. The employees' contributions are held in trust on their behalf. The employers' contributions are non-refundable. These funds are not held in trust for anyone.
Whatever one wishes to call this, its characteristic is identical to that of taxation. It is a dedicated tax, a tax whose proceeds have been committed to the provision of housing.
The fundamental issue that the NHT-Outameni saga has exposed, but which has been ignored by all commentators, is whether or not we should have dedicated taxation. The clear answer is that we should not.
We have a dedicated tax, in the form of the 60 per cent employers' contribution, which collects more money than the Government can spend for the dedicated purpose. At the same time, there are other areas of public expenditure which are grossly underfunded. Should not the employers' contribution be treated like any other taxation and be placed in the Consolidated Fund to be spent on national priorities that can be met?
The NHT contribution is not the only dedicated tax. There is also the HEART Trust Fund, which is funded by a three per cent payroll tax. We also have an education tax, which supposedly should finance education. In 2012-2013, the last year for which actual expenditure is in the public domain, the education tax collected $15.04 billion. The actual expenditure of the Ministry of Education in that year was $81.4 billion. The education tax accounted for a mere 18.5 per cent of the Government's expenditure on education in that year.
For the current financial year, the education tax is expected to contribute 23.3 per cent of the education budget. The existence of the education tax has led many to ask "why are schools not better funded?" The answer is clear: The education tax is insufficient to fund education.
Any allocation that can be attained by having dedicated taxes can also be attained through a parliamentary vote on expenditure. So, if dedicated taxes gave the optimal allocation of tax dollars, it would be possible to replicate that allocation without the dedicated taxes. We have demonstrated that dedicated taxes do not, in fact, lead to the best allocation of funds and, therefore, there is no economic reason for having them.
They exist for political reasons. The population questions where their tax dollars go, so the politicians, in order to have an easier political passage for taxation, declare that the additional taxes are for particular purposes. This, of course, is inefficient as it straitjackets government expenditure into areas that are not necessarily the most desirable or feasible areas at any point in time. Tax reform should abolish these dedicated taxes.