Thu | Aug 24, 2017

Aubyn Hill: Income tax relief - JLP right, PNP wrong

Published:Sunday | February 14, 2016 | 2:00 AM
PNP campaign spokesman Delano Franklyn, speaking at a press conference on February 5, ripped into the JLP's economic plan as reckless, deceptive and desperate. But Aubyn Hill, adviser to the opposition leader, says the JLP's number-crunching is credible.
Prime Minister Portia Simpson Miller pays over her nomination fee of $3,000 as a candidate for the constituency of South Western St Andrew at Greenwich Town All-Age School in Kingston on February 9.
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The way the minister of finance, Dr Peter Phillips, and his sycophants tell it, one could get the impression that the Jamaica Labour Party (JLP) is about to commit the most heinous offence by raising the PAYE tax-exemption threshold from the current $592,800 to $1.5 million.

It is simply astounding that as minister of finance, Peter Phillips would repeat the erroneous figure of $32 billion as the amount it would cost the Budget, when that cohort of employees that earns $1.5 million or less in basic salary is given the tax exemption proposed by the leader of the Opposition, Andrew Holness, in his recently announced 10-point economic-growth plan.

Just looking at the amount of PAYE collected in the past couple of years, the minister should have been very cautious about repeating the $32-billion figure. In fiscal year 2013-14, the amount was $62.8 billion, and the figure recorded for 2014-15, the figure is $67.8 billion. Even a cursory look at the actual collections in the two most recent completed years would indicate that it is highly improbable that close to 50 per cent of PAYE taxes collected by the Government would come from the two lowest rungs of paying employees. Unlike many of us, as the minister of finance, he did not need to take a cursory look; the figures are available to him.

Everything about Andrew Holness' 10-point plan seeks to facilitate, foster and encourage robust economic growth - something that Jamaica has not known in any half-decent number for more than a quarter of a century. The proposed PAYE tax exemption for those employees on the two lowest rungs of the economic ladder will stimulate growth without hurting the Budget.

The opposition leader's directive was very clear about getting the tax relief in place while being 'revenue neutral' - the technical term for not hurting the Budget. His discussions with business leaders in the private sector reinforced his unequivocal commitment to fiscal discipline.

 

LET PEOPLE SPEND THEIR INCOME

The Jamaica Labour Party firmly believes that people who work hard and earn their pay are much better at spending their own income than the Government can ever be at spending taxes retrieved from people's and businesses' earnings. In Jamaica, where the local currency has suffered depreciation in the vicinity of 45 per cent in the last four years, economic hardship is extremely painful at the salary levels this exemption will affect. As the leader of the Opposition and members of his economic team have been saying, these Jamaicans really need a financial break.

Also, there is broad agreement that persons who earn at the lowest level in our economy tend to have to spend most of their income just to cover basic living requirements. This high propensity to spend stimulates business activity across the economy.

In thinking of the poor in American society, former President Bill Clinton addressed putting money into the hands of the economic needy and said it best this way: "If you raise the minimum wage in a phased way, it always creates jobs. Why? Because people who make the minimum wage or near it are struggling to get by; they spend every penny they make, they turn it over in the economy, they create jobs, they create opportunity, and they take better care of their children. It's just the right thing to do, but it's also very good economics."

This comment is absolutely true for Jamaica, and especially applicable to the PAYE cohort that earns a basic salary of $1.5 million or less. Taking the average salaries in the bands between $600,000 and $1.5 million and factoring the big payment compliance rate for PAYE taxes, plus the amount that is paid in arrears from previous years, we estimate that PAYE exemption will be between $12.5 billion and $13 billion. The Jamaica Labour Party is very convinced that allowing the persons whom we have identified to get this spending cash will provide a significant stimulant to our creeping and even moribund economy.

Everyone should understand that there are certain aspects of managing the affairs of the country that the Jamaica Labour Party will approach differently from the present Government. The party leader and his economic team have left no doubt in the minds of Jamaicans that we will do everything possible to encourage and help the private sector and individuals to grow the economy. Andrew Holness has made it clear in his 10-point plan that making government more efficient and responsive is a key part of that growth agenda. So, too, is practising fiscal discipline and keeping the country's commitment with its multilateral partners. This particularly includes the extended fund facility with the IMF.

Given the party's sharp focus on fiscal discipline and Mr Holness' directive to keep the PAYE tax exemption revenue neutral, we arrived at the following position. We will use the funds from the $7 gas tax put on the back of the Jamaica people by the PNP government in March 2015.

In his submission to Parliament, the minister estimated that this new tax would provide $6.4 billion in revenues. We were told that $3.3 billion was used to buy the now underwater hedge at a strike price of about $66. In a letter dated November 19, 2015, to the head of the IMF, Dr Phillips outlined a new fund - Energy Stabilisation and Energy Efficient Enhancement Fund (ESEF) - to which the revenues from this new tax will go.

The letter stated: "Legislation and regulations governing the use of the ESEF will be adopted by February 2016, ahead of the parliamentary debate for the FY 2016-17 Budget. This is consequent on Cabinet's approval to prescribe a transparent governance structure ... on the allocation of these resources among its multiple objectives."

The Jamaica Labour Party is of the view that one of those "multiple objectives" is to return the $9.5 billion, part from the current fiscal year and all from the new fiscal year starting on April 1, 2016, to people who need it, and from whom the taxes should never have been taken in the first place.

The removal of the exemption threshold from employees who earn $5 million or more will provide $1.5 billion for this exemption. We consulted with Stanford Business School professor Renee Bowen, a Jamaican, who attended Immaculate High School, on the multiplier effect of this $12 billion-$13 billion being put in the pockets and hands of this group of employees with such a high propensity to spend.

After doing our own numbers, factoring in that portion of spend that would not attract GCT, and taking the benefits of consultation with Professor Bowen, we adopted a very conservative estimate of $1.2 billion being earned in additional GCT revenue from the total annual spend of this exemption.

Given the 3% pay increase that is scheduled for the new fiscal year, along with the regular 2% increment government workers receive, we extrapolated that 5% figure to employees in the private sector - reasoning that they would not be paid a lesser increment - and assessed new PAYE taxes of about $2.5 billion from persons earning above the salary threshold of $1.5 million per year.

We are also convinced that the new Jamaica Labour Party administration will be able to collect an extra $4 billion from taxes that have been filed but in arrears totalling approximately $50 billion. PAYE, as a part of this filed-but in-arrears figure, is approximately $17 billion. Andrew Holness and the Jamaica Labour Party will make the most of this needed and necessary tax exemption amount of about $13 billion, both as a stimulant to the economy and revenue neutral to the Budget.

- Aubyn Hill is CEO of Corporate Strategies Limited and chairman of the Economic Advisory Council of the opposition leader. Email feedback to columns@gleanerjm.com and writerhill@gmail.com; or tweet @HillAubyn.