Shift tax burden - Top economist calls for high GCT, low income taxes
One of Jamaica's leading economists, Dr Damien King, is suggesting that the Government, as part of its tax reform, lift the burden of employment taxes and transfer them to consumption tariffs such as general consumption tax (GCT).
"I would like to see the tax system shift away from an excessively burdensome 43.75 per cent tax on employment that is unfair, because only a small percentage of working people pay it, and shift towards taxes that can be levelled more fairly and more uniformly," King said.
King, head of the Department of Economics at the University of the West Indies, Mona, said yesterday that the cumulative tax on employment is 43.75 per cent. He said transferring the burden would not only assist in growing the economy but would reduce the level of social inequality.
"The tax on employment is the sum of all the taxes that bear up on the decision to hire somebody and pay them a salary," King said, adding that "a huge tax burden is borne by formal employment".
He said that having incentivised work and production, the Jamaican economy is going to expand.
Of the total tax revenue of $411.8 billion that the Government intends to collect this year, pay-as-you-earn (PAYE) accounts for $71.3 billion and education tax, another $21.1 billion.
King's calculation takes in income tax, education tax, HEART and National Housing Trust and National Insurance Scheme contributions made by both employers and employees.
It is not the first time that the suggestion has been made for a shift from income taxes to consumption taxes.
Dr Christopher Tufton advanced a similar argument in Parliament recently and, before then, a private-sector working group put forward an almost identical proposal as part of tax reform.
Those proposals have never found favour with lawmakers.
"I don't know why governments and societies don't accept perfectly sensible economic policy. We know that political decision makers are motivated by what resonates with the electorate, and so things that don't resonate with the electorate have a very slim chance of being implemented," King said.
"We have had substantive comprehensive tax-reform proposals in the last dozen years, all of which were excellent proposals and thoroughly researched, and persuasively argued and they were not implemented," King said yesterday as he argued that the rebalancing of the tax scales would stimulate new production, shrink the informal sector, and reduce unemployment," he said.
William Mahfood, president of the Private Sector Organisation of Jamaica (PSOJ), said that King's suggestion, in theory, is a good one.
"The problem that we would have is the collection of such a consumption tax. I think that currently the systems that we have in place for PAYE and the collection of statutory deductions like the NIS and the NHT are probably better than the system for the collection of GCT. So, in theory, it is a much better form of taxation by far. The problem is that I don't believe we have the necessary systems in terms of collection, enforcement and auditing to be able to make that switch," Mahfood told The Gleaner.
Meanwhile, King argued that income tax, which is charged at 25 per cent, is highly inefficient, stating that a large proportion of income earners are not paying it.
"If you look at the size of the employed labour force and you look at the number of people paying PAYE and add to that the few that submit income tax returns and pay income tax, it does not come to anywhere near the size of the employed labour force.
There are some 268,000 PAYE workers in the employed labour force of 1.3 million people.
As part of the tax-reform efforts, the Government has said the threshold for personal income tax will be increased to J$592,800 per year effective January 2016, to lighten the burden on employees with incomes below that level. Finance Minister Dr Peter Phillips has in the past said it is the policy of the Government to reduce rates over time.
Yesterday King said the additional revenue that is collected as a result of moving away from income tax to consumption taxes could be used to improve schools and health facilities that are currently under funded.
"Shifting from income taxes to consumption taxes would yield more than sufficient additional revenue to increase the amount in the expenditure side of the Budget devoted to achieving social equity. I think, therefore, that the country would better and more effectively meet the objective of reducing social inequity by doing so," he added.
"We already have effective ways of targeting and meeting the needs of poor people. To say that income tax and consumption tax is the way that you are tackling that problem is completely ignoring how you should be going about it which is through programmes like the PATH (Programme for Advancement Through Health and Education), which is perfectly targeted and addresses precisely the greatest needs of those who are struggling the most," the economist said.
PATH is a conditional cash transfer programme that provides benefits to more than 370,000 Jamaicans in approximately 13,000 families.