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EDITORIAL - Getting serious about tax reform?

Published:Monday | May 16, 2011 | 12:00 AM

For the better part of two decades, Jamaica has threatened to overhaul its tax system to create one that is equitable and conducive to investment and growth.

Policymakers pull back at the brink, fearful of political consequences of acting and possible loss of revenue in circumstances of fiscal deficits. So, they tinker, doing little to liberate economic activity.

We might, however, be about to get serious.

Last week, the finance minister, Mr Audley Shaw, tabled a Green Paper proposing new arrangements that would, among other things, lower general consumption tax (GCT) by five percentage points, to 12.5 per cent, and remove the zero rating and exempt status on a range of items.

The threshold for the payment of personal income would be increased and corporate and personal taxes would be equalised at 25 per cent, which would represent a drop of eight percentage points in the tax that firms pay on their profit. Import duties would also be lowered, but a range of exemptions offered to firms and sectors disallowed.

Most of these proposals are not new. They are generally in line with what were advanced six and a half years ago by the Matalon Committee, from which Mr Shaw's predecessor, Dr Omar Davies, had commissioned recommendations.

tax burden unequally shared

But it is not only that implementation has lagged, but the lack of reform meant that too few Jamaicans shouldered the country's tax burden. Indeed, in his contribution to the 2008-2009 Budget Debate, Prime Minister Bruce Golding noted that on average, customs-duty collections amounted to only five per cent of the value of imports, well below the norm in other countries.

Additionally, at that time, one per cent of the registered companies paid 75 per cent of the corporate taxes. The reverse was also true.

More damning was the estimate that 80 per cent of company taxes and 50 per cent of property that should be in the coffers of the national Treasury were not being paid. And apart from the people on the Pay-As-You-Earn roll, only 4,000 Jamaicans, out of a projected 250,000 who were eligible, paid income tax. Also, an equivalent of the taxes collected was foregone in relief, waivers and concessions.

reform crucial

The situation has improved over the past three years, but not substantially. The case for reform, therefore, is unassailable.

But fundamental reform of the tax system will not be easy. There will, for instance, be the argument that broadening the range of products subject to GCT will be a disadvantage to the poor, who spend a greater portion of their income on food. However, that benefit goes to persons who are not poor and should be entitled to the break. It is economically far more efficient to target subsidies directly to the persons who should get them.

The management of waivers and special concessions is often inefficient, implying that bureaucrats are better at allocating resources and determining winners than markets. This is not to suggest that there is no need for special attention, but these should be few and far between.

The Government, if it is to be successful at this project, has to be frank and open with all stakeholders.

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