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EDITORIAL - GCT subsidy to the rich

Published:Thursday | March 15, 2012 | 12:00 AM

JOE MATALON'S Private Sector Working Group (PSWG) continues to make the most compelling and persuasive case in Jamaica's debate on the tax reform.

A centrepiece of their plan - articulated again yesterday before parliament's Tax Reform Committee - is for Government to end the massive and wasteful consumption subsidies it affords the wealthier people and to give more, more efficiently, to the poor. Yet, knee-jerk ideologues, ostensibly in defence of the poor, are contriving to make this proposed giveback controversial.

At issue is the PSWG's proposal to lower the rate of the general consumption tax (GCT) from 17.5 per cent to 12.5 per cent, but widen it to include most goods and services that are now either exempt or zero rated. The critics, without offering more and ignoring the private sector's broader argument, say that hiking the GCT rate will hurt poor people by raising the price of the goods they consume. Disingenuously, the suggested widening of the GCT net is counterposed against proposals for lower personal and corporate income tax rates as examples of private-sector leaders seeking to protect their interests at the expense of others.

The status quo

The ideologues want the status quo to remain. The facts, though, show that the status quo, as we have previously pointed out, favours the rich.

For every dollar of revenue the government forgoes in GCT exemptions, the poorest 20 per cent of Jamaicans benefit by 11 cents.

On the other hand, more than twice that goes to the wealthiest one-fifth of the country. They account for nearly 28 cents on the dollar, or $6.3 billion of the estimated $22.6 billion that GCT exemptions 'cost' the government. The 'cost' for the poorest 20 per cent is around $2.5 billion.

The bottom line: middle and upper-income people benefit far more than the poor from current GCT exemptions. Moreover, the high rate of GCT encourages fraudulent classification of goods so as to avoid the tax.

The PSWG calculates that lowering the rate and widening the GCT net will increase revenue by $7.6 billion. But this does not mean that the poor will consume less, if there is targeted delivery of subsidies to those who are most vulnerable rather than doling the subsidy to the well-to-do.

The PSWG calculates that, with the lower GCT rate, it will cost an additional $2 billion for the poorest 40 per cent of Jamaicans to maintain consumption at current levels. We, like Mr Matalon, insist that it cannot be beyond Jamaica to find a way to channel cash directly and efficiently to targeted groups.

Existing framework

Already, there is a good framework that exists in the Programme for Advancement Through Health and Education, which provides support for poor families. We, like Joe Matalon and his group, believe that this programme can be tweaked so as to mirror, to a greater degree, Brazil's much-hailed Bolsa Familia programmes that deliver cash grants to families and are credited with helping to lift millions out of poverty.

Although the GCT proposal would bring in more revenue to help close the fiscal deficit, the impact on consumption among wealthier Jamaicans is likely to be minimal. Indeed, a combination of the GCT measure and lower tax rates could help to stimulate consumption.

The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.