Robert Buddan, Contributor
I support the minister of finance in his war of words and contest of will with the private sector, specifically his charge that too many companies and individuals are avoiding or evading taxes, and that the Government's priority will be to make Jamaicans tax-compliant rather than lower taxes as the private sector demands.
Government's figures show that only 4,000 Jamaicans are paying taxes (apart from the PAYE taxpayers). It shows that 80 per cent of company taxes and 50 per cent of property taxes are not being paid or collected. (In fact, latest figures show that only 44 per cent of property taxes were paid up to the end of March 2008). Only one per cent of registered companies account for 75 per cent of corporate taxes and 75 per cent of registered companies account for less than one per cent of corporate taxes.
Customs duties amount to only five per cent of the value of imports. On top of this, companies get tax relief, waivers and concessions to the tune of 60 per cent of revenue collected. All of this means that the effective tax rate in Jamaica is already very low but only a few individuals and companies are paying taxes, defying the economic argument that the lower the tax rate, the more people who pay taxes.
The private sector's complaint that the charge of tax cheating is too sweeping is to miss the point purposely. The degree of tax avoidance/evasion is so great as to justify a sweeping charge, knowing that this could not be taken to apply to every single company. Besides, when others make sweeping statements about politicians being this and politicians being that it seems to be no problem then.
The private sector's other complaint that the minister's statement makes him and his Government appear to be hostile to business is a well-used scare tactic. We don't hear that our attitudes towards Spanish hotel investors will drive away foreign investors. The complaint is therefore self-serving. No one can really argue that this Government is unfriendly to business, especially since it relied so much on big business sponsorship of its last election campaign and, I would venture to say, this includes many of those in the private sector organisation who are feigning concern. Government is friendly to business but expects business to be friendly to the nation by fulfilling its duty to pay taxes so that vital national functions can be paid for.
The private sector says that taxes should be lowered so that more people will have the incentive to pay. This is a farcical argument. The president of the Private Sector Organisation of Jamaica is reported to have said that tax compliance would increase by 40 per cent. In that case, more people should be paying something, however low, but this is not happening. I don't know where Chris Zacca got this figure from and how much that study, if there is one, can be trusted.
Mr Shaw is right because his diagnosis is correct. The problem, as he says, is a culture on non-compliance, as I have also argued before. There are mechanical economic theories around that say that if persons are asked to pay less taxes then more people will pay. People avoid taxes because taxes are too high. They are willing to pay but cannot afford to.
But what if, as Mr Shaw says, there is a culture of non-compliance, of evasion and avoidance? In this case, people are habituated to break the law. The usual assumptions of economic behaviour do not apply. Culture forms behaviour and affects the economic expectations of human behaviour.
Bruce Golding ascribed the problem to inefficiency, inequity and leaks in the tax system. Mr Shaw was more to the point. The problem was not so much the fault of institutions but of a culture of non-compliance, or a culture of cheating and dishonesty. It exists in the upper class as much as the lower class.
Culture of permissiveness
What is worse, however, is that we have a culture of permissiveness too, that encourages this culture of non-compliance, even if that is not the intention. For example, the Government has given the non-compliant taxpayer until the end of June to pay, and if that is done all penalties and interest will be forgiven. After June, penalties and interest will still be forgiven, but on a sliding scale.
Habitual cheaters who deny the country vital resources should not enjoy such forgiveness while a goat thief is treated harshly. It is not just that the tax system is inequitable, as Mr Golding says. Rather, the system of justice is inequitable, one system for the propertied and another for the propertyless.
The permissiveness shown to tax cheaters is self-defeating. The culture of non-compliance exists because people wait until the last minute, or never comply at all, always planning and hoping for a way out, sometimes by corrupting officials or exploiting administrative inefficiencies. That is why people have got away for so many years and feel they can always get away. In the end, tax amnesties never bring in what is expected and revenues continue to run woefully short.
The result is bad governance. There is not enough money to do the many things we want. Take this example. Calvert Thomas, who is director for revenue enhancement in the Department of Local Government, says that even with the collection of some arrears last year, it was well below what government had hoped to collect, by some 26 per cent, in fact. This could only fund half of what solid waste management cost. The difference had to be made up for out of the Consolidation Fund. Property taxes could only pay for a minuscule amount of the cost of street lights, about two per cent. Again, the rest had to come from the Consolidated Fund.
The private sector has always blamed government for the country's failures and usually believes that less government is best government. But Jamaica's tax-compliance rate, using government's figures again, is a measly 38 per cent compared to 60 per cent to 80 per cent for developed countries. Right now tax arrears amount to a shocking $138 billion while the country will be paying $140 billion in loan repayments this year. We hear about government's debts but hardly about society's debts to government, an amount that would wipe out our fiscal deficit.
Mr Shaw says that the debt to government, minus penalties and interests, is $59 billion. This means that the tax amnesty is very costly, nearly $80 billion, and too costly for a society with the great needs we have. Corporate income tax makes up 68 per cent of the arrears.
The twin cultures of non-compliance and permissiveness lie at the heart of our law and order problems that run from tax delinquency to all the daily disregard and disrespect by motorists, pedestrians, vendors, sound system operators, among others, while the police look on (as The Gleaner reported on June 18, under the headline 'Lawless'). This is where our problems lie.
Now, a senior health official in that ministry, Dr Kevin Harvey, recommends decriminalising the activities of commercial sex workers, taxing them, and using the estimated gain of $3 billion to fund HIV and other health-related programmes. It is well intentioned but isn't this more permissiveness (of prostitution)?
Robert Buddan lectures in the Department of Government, UWI, Mona. Email: Robert.Buddan@uwimona.edu.jm. Feedback may also be sent to columns @gleanerjm.com.