Editorial | Tax policy debate

Jamaica’s economy is significantly changed from 2016 when the Jamaica Labour Party (JLP) decidedly altered the tone and trajectory of the election campaign with a promise to hike the personal income tax threshold to J$1.5 million – a jump of over 65 per cent.

A decade ago, despite having pulled back from a fiscal precipice, and again having a toehold in global financial markets, Jamaica was only feeling the early blushes of macroeconomic stability. Over the previous four years, the debt-to-GDP ratio had dipped by around 20 percentage points, but was still at a stifling 120 per cent. The Government remained in an economic reform agreement with the International Monetary Fund, requiring it to maintain a primary balance of over seven per cent of GDP so as to continue the rapid paydown of the debt. While most macroeconomic indicators pointed in the right direction, unemployment was over 10 per cent. Growth was weak.

The JLP narrowly won the election, gaining 33 of Parliament’s 63 seats, to unseat the People’s National Party (PNP). The victory was widely attributed to the so-called “1.5”.

Two election cycles later, personal income tax (PIT) is again a key feature in the campaign for the September 3 parliamentary elections. Both parties have promised concessions to seniors and to end the tax on tips and gratuities to workers in the hospitality sector. The PNP, additionally, has said that it will remove the tax on overtime pay for all categories of employees.

WHAT THE PARTIES PROPOSE

The crux of the competition, however, is over what the parties propose for the income tax threshold and marginal tax rate.

The PNP’s promise is to raise the threshold to J$3.5 million at the start of the next fiscal year, from the current J$1.7 million. The JLP had previously committed to continue annual adjustments in the threshold, until it reaches J$2 million in the 2027-2028 fiscal year.

However, it now committed, according to the party’s manifesto, to “a disciplined, deliberate phased move towards a long-term base rate for personal income tax of 15 per cent’’. The current income tax rate is 25 per cent on income up to J$6 million, and 30 per cent above J$6 million.

“This will promote fairness and equity by ensuring that all contributors to national development are treated fairly, and reward effort and enterprise by broadening the tax net so that the responsibility of funding public services is more evenly shared, all while maintaining the economic stability we have worked so hard to achieve,” the JLP manifesto says. There is no stated time frame as to when the 15 per cent would kick in, should the party retain the government.

Meanwhile, the PNP has explicitly said it will not have to impose new taxes to fund its income tax policies. The JLP, on the other hand, has been more implicit, with consistent references to not having brought new tax measures in eight years, although it has also signalled a pivot to more indirect taxes.

NEED FOR DISCUSSION

This newspaper, as we did in 2016, insists on a discussion based on hard numbers – as well as the philosophical underpinnings of the policies.

“We will fund the commitments that have been made within the existing envelope of the Budget, including the projections for growth, without any need to impose any new taxes or burdens on the Jamaican people,” said the PNP’s shadow finance minister, Julian Robinson.

He has argued, too, that the tax relief, including those on overtime pay and gratuities, which will overwhelmingly benefit middle classes, will drive consumption, thus encouraging growth beyond, he believes, the two per cent projected over the medium term.

Two things are worthy of reminding:

• Economics, fundamentally, is about choices – giving something here is likely to require adjustment there, which, in this case, could mean holes in the Budget; and

• The increase in the PIT threshold after the 2016 general election was not as straightforward as it is often made to seem.

On the campaign trail, it was argued that there would be no need for new taxes to fund the give-back. It would be financed by the cancellation of an oil hedge for which, it was argued, Jamaica had no need. This would be bolstered by other relatively minor shifts in the Budget.

MAJOR GAPS

The Gleaner, and others, pointed out at the time that the cost of the policy was grossly underestimated – by as much as 50 per cent – and, if implemented as proposed, would leave major gaps in the Budget, especially in the context of the fiscal reforms being undertaken. Issues of anomalies would also have to be addressed.

The increase in the threshold, in the end, did not happen in one go. It was done over two fiscal years. The oil hedge was indeed cancelled, but the at-the-pump tax on petrol was increased by 29 per cent to J$7, which was part of a J$13 billion in new taxes, mainly on petroleum products.

There is wide consensus that tax reform is necessary. But the deeper questions are, who, ultimately, pays for what’s on offer, and critically, what are the likely returns to the economy?

The PNP’s threshold increase, on its face, directs relief downwards, with people earning under J$3.5 million benefiting most from having PIT eliminated entirely. Nonetheless, since all taxpayers benefit from the higher threshold, higher earners also receive larger absolute gains.

The JLP’s rate reduction casts a wider net but leans towards higher earners, which raises questions of equity, and what, from a policy perspective, this group would be expected to do with their windfall.

We look forward to these policy issues being fully ventilated.