Sun | Jun 20, 2021

EDITORIAL - Tax reform and Karl Samuda

Published:Friday | March 16, 2012 | 12:00 AM

On the surface, Mr Karl Samuda's argument appears compelling. "One of the challenges you are going to face as a country when you remove all of this (tax waivers to firms)," he told Parliament's tax reform committee, "[is that] it forms a disincentive for persons looking for destinations within which to invest." The result, he went on, is that "you compromise our ability to grow and expand and earn revenue".

His case loses potency once juxtaposed against the facts in the full context of the reform package of the Joseph M. Matalon-chaired Private Sector Working Group (PSWG).

For decades, Jamaica has afforded firms waivers and other tax breaks. Most of these are at the discretion of the finance minister and granted at his whim.

Ineffective waivers

By the PSWG's estimates, each year, waivers and other incentives amount to between 30 and 40 per cent of all revenue. Mr Samuda's former party leader, the ex-prime minister, Bruce Golding, held it to be more.

In 2008, when still head of the Government, he said: "For every $100 of revenue we collect, $60 goes out in tax relief, waivers and concessions."

Yet, Jamaica has not been especially successful at attracting investment - domestic or foreign. Nor have the waivers been matched by economic growth which, over the past decade, averaged under one per cent a year.

Yet, waivers, as Mr Samuda would appreciate, are market distorting. They are subsidies to the sectors that get them and a cost to everyone else. That was part of the narrative of Mr Golding's launch, nudged on by the International Monetary Fund, of the tax-reform project.

The foregoing notwithstanding, we might have been more sympathetic to Mr Samuda's fears were the removal of waivers the only leg on which Mr Matalon's reforms rested.

But the PSWG proposes the lowering of corporate income tax from 33.3 per cent to 15 per cent, once profits are kept in firms. If a firm distributes its earnings, it would be subjected to another 10 per cent tax on its income, bringing it in line with the top rate for personal income tax.

Businesses, therefore, have a clear, predictable incentive, absent of ministerial whim, to reinvest their profit. That, or a variation thereof, is a better approach to policy.

Moreover, the lesson, globally, is that jurisdictions with lower tax rates tend to have higher growth rates. That usually means more jobs and better, or improving, standards of living.

Focus on gct

Mr Samuda is on firmer ground if he believes, as is the fact, that the exemptions from the general consumption tax (GCT), at the current rate of 17.5 per cent, benefits the well-to-do and wealthy far more than the poor. It would make more economic sense, therefore, if GCT were lowered to 10 per cent, the net widened, and cash grants given directly to the most vulnerable to maintain their current level of consumption. Mr Samuda, however, is concerned about buy-in from the poor if they are not assured that they will be cushioned.

The role of people like Mr Samuda in circumstances like these is to give people the facts and help urge buy-in. He must also insist that the Government put in place a credible mechanism for the delivery of support to the poor.

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.