Editorial | Tax reform back on agenda
Damien King, the University of the West Indies (UWI) economist, has, as reported by this newspaper, suggested that an old complaint of Jamaican policymakers, which the Holness administration suggested it was on its way to fixing, remains alive and well. Too few people pay too much tax.
"Jamaica's tax revenue, at 24 per cent of GDP, is below the global average of 28 per cent, yet people feel overburdened," Dr King remarked in a series of recent tweets. "This is because too many are outside the net entirely, so the ones actually paying are paying too big a share."
When the Holness administration, in keeping with his election campaign, in two tranches, increased the income tax threshold from J$592,800 to J$1.5 million, part of its argument was that it would ease the burden, and, by a move to consumption taxes, capture more people in the tax net. The policy, it was reported, relieved around 400,000 of income tax, half of them in the last fiscal year. That left under 70,000 people on the income tax roll.
To compensate for the lost revenue, thus making the policy revenue neutral and not jeopardising the Government's agreement with the International Monetary Fund (IMF), the administration had to impose more than J$30 billion in new taxes, most of them consumption related.
On the face of it, the project has worked. At least, there was no fallout from the policy change. During the last fiscal year, tax revenue, at approximately J$490 billion, was 1.4 per cent ahead of projection. The collection of general consumption tax (GCT), at the domestic level, was right on target, at 18.5 per cent of total tax revenue. For the first five months of the current fiscal year, up to August, tax revenue was J$7 billion, or nearly four per cent, ahead of target.
Nigel Clarke, the finance minister, sees the increase as evidence of greater efficiency in collection and a vindication of the Government's decision not to raises new taxes this year, which, in the past, was used to "mask or hide inefficiencies". But even if the tax inflows continue to outperform projections at the current four per cent rate, that would add roughly J$21 billion to the budgeted tax take, which would take overall tax revenue to J$539 billion, or J$49 billion more than was collected in 2017-18. Even then, tax revenue, without accounting for inflation, would still be more than J$30 billion below what would be required to lift Jamaica's tax revenue to the global average of 28 per cent of GDP, which, according to Dr King, is the notional level required for the country to deliver services at the expected quality.
A number of factors are significant in this regard. Among them, based on Dr King's observation, is the decline, in recent years, by upwards of three percentage points, in the ratio of tax to GDP. Another is how to lift this ratio without adding unfair burden to the same group of taxpayers and create distortions and discouragement in the taxed sectors.
This will require deeper thought and more robust analysis than the policy-on the-fly approach that initially accompanied the income tax adjustment project when the Government, having got its sums wrong, said that it had implemented the new threshold without adding new taxes or jeopardising the fiscal accounts.
In the face of harsh realities, it had to abandon that idea. It is not known how much things have changed since then, but a decade ago, then Prime Minister Bruce Golding noted that one per cent of registered companies accounted for 75 per cent of corporate taxes. Conversely, 75 per cent of the registered companies paid less than one per cent of taxes. Eighty per cent of the company taxes and 50 per cent of property taxes were not collected. Significantly, apart from the people on the PAYE roll, only 4,000 individuals paid income tax. It was estimated at the time that a quarter-million people should have been.
It's time, it appears, for a deep, rational conversation on tax reform.