Who really pays the taxes?

Lambert Brown, Contributor

\It is said that two things are certain: death and taxes. Not certain, however, are the forms in which either death or taxation will be visited on an individual.

Prior to 1991, Jamaica's tax system was, in the main, based on income rather than consumption. The higher one's earnings, the more one was expected to pay. At that time, people who paid taxes were able to claim tax refunds if they had been overtaxed. It was, in many ways, like the United States' tax system. This is called progressive taxation. This same system also operates in the United Kingdom.

At that time, we did not have tax on consumption. However, powerful forces in the country lobbied for a change from income-based or progressive taxation to consumption-based or regressive taxation. We were told that such reforms would have led to greater investment and the economy would grow leaps and bounds. Twenty years later, we are still waiting for the fantastic growth that was promised by the proponents of regressive taxation.

During those 20 years, general consumption tax (GCT), which started out at 10 per cent, has grown to 17.5 per cent on the majority of goods and services. In respect to phonecards, it is as high as 25 per cent. In the last four years alone, more than $60 billion in new taxes have been levied on the backs of the Jamaican people.

Failing tax system

The current regressive taxation system has failed to deliver prosperity to the Jamaican people.

In recent weeks, the same powerful sections of the private sector are proposing new tax measures to the Government. This is designed to earn more than $7 billion more for Government.

The country is being told that the proposal is intended to "ease the tax burden" on the population. Among the proposals are measures intended to reduce the amount in taxes paid by companies on their profit from 33.3 per cent to 15 per cent. This will see the Government giving up approximately $5.5 billion. Clearly, this will be a big benefit to the private sector.

The proposal also calls for the Government to reduce GCT from the current level of 17.5 per cent to 12.5 per cent. This sounds good, but the trick is that a lot of items, especially basic food and necessities like sanitary napkins that are now exempt, would be taxed. This will put additional burdens on the poor and the middle class.

The real winner in this tax-reform proposal will be certain sections of the private sector. True, some in the private sector will lose their waivers and some may end up losing their businesses too. The real losers will be the bottom 40 per cent of the Jamaican population.

I cannot, in good conscience, support the proposed tax measures.

The poor will pay

First, under regressive taxation, businesses can pass on their taxes to the consumers. As the final leg in the purchasing chain, the consumer has no one to pass the tax burden to. When we start taxing basic food and necessities, it will be the poor who will end up paying the bulk of the taxes.

Second, there is no guarantee that tax rates will not move from the proposed 12.5 per cent upward in the future. Remember, GCT started at 10 per cent in 1991 and crawled to the current 17.5 per cent. It can happen again. In fact, in 2009, The Gleaner reported that consideration was being given to moving GCT up to 21 per cent. Interestingly, some of the private-sector leaders now pushing the current proposal are on record as supporting the higher rate then. What is there to stop them from doing so again?

Third, while wanting to reduce taxes on profit, absolutely no mention is made of removing the $14 billion now being paid by PAYE workers and employers as education tax. This means that the effective tax rate for workers is actually more than the current 25 per cent of taxable pay. This is because education tax is paid from the first dollar earned, without any tax-free threshold. Though called education tax, it is not used strictly for educational purposes. It is, in fact, part of the general revenue. This is unfair.

Fourth, given that Jamaica now faces a serious economic crisis, one section of society should not appear to be seeking benefits for themselves. This is a time for all Jamaica to come together and make sacrifices for the good of the nation. This is the time to ask not what Jamaica can do for me, but what can I do for Jamaica. If it is true that only 3,000 of 60,000 registered businesses are paying taxes, the answer must be to demand that the other 57,000 do, as the PAYE workers have to do - pay their taxes.

A different approach to taxation is needed. Let us, like the US and the United Kingdom, do a hybrid of the progressive and regressive systems of taxation.

Let us start by identifying and targeting the reduction of waivers to special interests. Let us redirect the education tax to the crime-fighting budget. If we dedicate that sum to reducing crime, we could put more police and soldiers on the ground, while creating new jobs. With a reduction in crime, we should see GDP growth, potentially leading to increased tax revenue. This is a win-win position.

Wrong direction

Clearly, our current approach to taxation is taking us in the wrong direction. It leaves us with an insatiable appetite for more taxes. This has been the experience since 1991. Craft a strategy that truly eases the burden from the poor, emphasising growth through productivity and innovation.

We need an approach to tax reform that involves all the people, not just a few. The participatory model is the best way to get national consensus. We need a system that provides accountability, where measurable targets and goals are set so that, as a nation, we can constantly evaluate and make adjustments. This approach will develop a sense of responsibility among our people to recognise our obligations to pay our fair share of taxes.

The debate on tax reform must become the opportunity for Jamaica to realise the dream of ending injustice in the tax system. Let us find fairness, equity and simplicity in a way that all of us, and not the masses, will bear the lion's share of taxes.

Lambert Brown is president of the University and Allied Workers Union and a government senator. Email feedback to columns@gleanerjm.com and Labpoyh@yahoo.com.