Let's talk taxes
Why more taxes?
The new fiscal year started on Monday and the government is yet to fully comply with all the requirements of the IMF necessary to secure the new agreement. One such requirement is to demonstrate that the country can achieve a primary balance of at least 7.5 per cent of the total of what the country produces per year, i.e. 7.5 per cent of GDP. These new tax measures, introduced on Monday, are in an effort to increase tax revenues in order to meet this requirement. The primary balance as of February 2013 is approximately 4.1 per cent of GDP, which means Jamaica needs an additional increase of 3.4 percentage points to reach the 7.5 per cent target.
What are the new income taxes that took effect as of April 1?
There are several new taxes that took effect at the start of the new fiscal year. Those that will have an impact on our income are:
1. Increased tax on dividends payable to residents to 15 per cent, which is expected to earn $0.8 billion in revenue for the government.
2. Imposition of a surtax on the taxable income of large, (income more than $500 million) unregulated companies (companies not regulated by any government ministry or department); expected to earn $1.2 billion
3. Increase in education tax rate by 0.5 percentage points for employers and 0.25 per cent for employees and self-employed. Employers contribution will increase from 3 per cent to 3.50 per cent, employee and self-employed from 2 to 2.25 per cent, expected to earn the government $2.8 billion.
Any other taxes?
Along with the income tax measures, there are additional trade tax changes and other revenue measures; Customs Administration Fee on all imports except for charitable organisations and the bauxite sector; expected to earn $1.2 billion. Other revenue measures include:
1. Increase in local stamp duty rates and transfer tax. The increases in stamp duty from 3 to 4 per cent and transfer tax from 4 to 5 per cent are expected to earn the Government $2 billion.
2. Increase in lottery tax from 17 and 23 per cent, 20 and 25 per cent, respectively which is expected to earn $1.5 billion.
3. Reform of the property tax rate; $1,000 for unimproved value up to $100,000, 1.5 per cent for unimproved value between $100,000 and a million, and 2 per cent for everything over a million dollars. This is expected to earn the government $3.4 billion.
What are the implications of these new taxes?
These tax measures, presumably, will earn the government an additional $15.9 billion in tax revenues for the upcoming fiscal year. This is expected to improve Jamaica's fiscal and primary balances, which are common measures of the soundness of the government's spending practices. The fiscal balance is simply government's total revenues minus total expenditure. For example, if the country earns $1000 per year from taxes and has expenditure of $800, the fiscal balance is $1,000 minus $800 which is equal to $200. If the fiscal balance is positive such as in this example, it means that the country is sustainable and can pay for its expenses from its receipts. In Jamaica, the fiscal balance is negative since expenditure is more, than revenue receipts due to high loan and interest payments. Jamaica's fiscal balance as of February is negative J$62.639 billion.
What about the primary balance?
The primary balance is similar to the fiscal balance but excludes all interest payments for loans. This is a good indicator of the current fiscal efforts of the country since interest payments are as a result of previous debt negotiated before the current year. Using the example above, if $100 from the total expenses is for interest on loan payments, this would be excluded when calculating the primary balance, such that, the primary balance would be $1,000 minus $700 which equals $300 instead of $1,000 minus $800. The primary balance is normally higher than the fiscal balance and is the main measure of a country's fiscal position if the government has high public debt. Such is the case in Jamaica now. Jamaica's primary balance, as of February 2013 is positive J$61.057 billion.
What is the overall effect on the economy?
The new tax measures will increase revenues for the government if people comply. However, it is clear that these measures will have a negative effect on the overall economy. The increase in education tax, property tax, and tax on dividends will constrain people's income, and by extension, their consumption levels. The increase in import duty (CAF) and the increase in corporation tax will negatively affect firms' output and profitability, which will have further impact on how much the government can really collect in taxes. Overall, the government can increase taxes by so much and no more, but if there is not a platform to increase production in the country, the real economic situation will continue to worsen.
Dr André Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email firstname.lastname@example.org.