Editorial | Extend personal income tax debate

With the general election concluded with another victory for the Jamaica Labour Party (JLP), the Holness administration should extend with itself the debate about income tax policy it had with the People’s National Party (PNP) on the campaign trail.

Indeed, at the first meeting of the new Cabinet, Prime Minister Dr Andrew Holness should pose to the ministers the question asked by this newspaper on the eve of the September 3 vote: is an income tax the best way to spend the dividend accrued from having paid down the national debt, as a proportion of GDP, faster than scheduled?

At the same time, the administration, from the vantage point of government, rather than from the perspective of a political party on the hustings, should robustly revisit the issue of whether a downward adjustment of the rate of personal income tax, and recouping the losses via indirect taxes, is the most equitable approach to taxation policy.

In his swearing-in speech on Tuesday, in which he revisited large swathes of his campaign agenda, Prime Minister Holness didn’t address income tax policy. Yet, it was the most evocative issue of the election.

The PNP promised to raise the income tax threshold – the level at which workers begin to pay taxes on their earnings – from J$1.7 million to J$3.5 million.

They estimated that the scheme would cost J$55 billion, which would be funded by reallocating internal resources, expanding the economy’s anaemic one per cent growth rate, and taking advantage of the fiscal space provided by reaching the targeted timeline for lowering the debt-to-GDP ratio to 60 per cent or less, two years ahead of schedule. New methods for calculating GDP means that the ratio will be achieved during this fiscal year.

BETTER FISCAL POSITION

The government has been adjusting the tax threshold upwards since 2017, projecting to reach J$2 million in 2027/28. But, during the campaign, it announced a plan to reduce, on a phased basis, the personal income tax rate from 25 per cent to 15 per cent – or a drop of 40 per cent.

Neither Prime Minister Holness nor the finance minister, Fayval Williams, gave an implementation date, although it is expected to happen relatively early in the life of the administration.

The government said the adjustment would cost between J$25 and J$30 billion a year. The Opposition put a price tag of J$70 billion, which, on its face, seems more realistic.

This newspaper never questioned the ability of either side to finance its proposal. For, fundamentally, economics is about choices. If a government concentrates capital in one area, it likely means that it will have to lessen, or forgo, spending in another. Such decisions are informed on expected policy outcomes.

Or, a government may make adjustments to policy priorities to accommodate their implementation. For example, in 2016 when the JLP opposition promised to raise the income tax threshold by 65 per cent to J$1.5 million, and to fund adjustment from existing resources, it discovered in government that it couldn’t proceed as planned. Instead, it implemented the adjustment in two tranches and was forced to raise an additional J$32 billion in taxes.

Despite continuing to struggle with puny growth rates, Jamaica is in a significantly better fiscal position now than nine years ago when the national debt was 120 per cent of GDP. That ratio was a decline from nearly 150 per cent four years earlier, when the island was shut out of international capital markets and looked at askance by multilateral financial institutions.

Moreover, in 2016, the island was in the third year of an Extended Fund Facility (EEF) agreement with the International Monetary Fund (IMF), which required the government to achieve a punishing primary surplus of 7.5 per cent of GDP, in order to aggressively pay down the debt to reach the 60 per cent ratio set out in a fiscal accountability law that was part of the reform project.

GREATER BENEFIT

Having now met that ratio, the government doesn’t have to put aside as much as in the past for debt servicing. It is estimated that the projected primary balance of 5.1 per cent of GDP this fiscal year can in the future be trimmed by around two percentage points, which would free around J$70 billion for the government to spend elsewhere.

The question for the administration is where should that money go: to fund tax givebacks, or be put to education, health, infrastructure or other social services?

While these are fundamentally policy questions, they are founded in a government’s philosophical outlook, including the approach it believes will be most effective in delivering its objectives.

It is a philosophical question, too, whether a government decides to raise the income tax threshold or lower the tax rate, and, in the case of the latter, recoup the losses via indirect taxation.

While everyone benefits from a lower income tax rate, the greater benefit is to the wealthy and the better off rather than the poor, who consume a greater proportion of their income. All things being equal, the less well-off are hit harder by indirect taxes.

In other words, a lower tax rate and a shift to more, or higher, indirect taxes, is a regressive and therefore less equitable tax regime. But then the government may expect those who benefit most will invest more.