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Withdrawal tax — the antidote

James MCNISH

Wednesday, April 30, 2014    

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AMID our economic challenges, the ubiquitous debate relating to tax on withdrawal soars. Our economic recovery is in its infancy and we continue to face economic headwinds, such as high debt to GDP ratio and persistent devaluation. Policymakers need to be bold and decisive, but sensitive, so as not to undermine public confidence causing the citizens to be leery. To achieve the economic growth agenda, the trust of the entire country is a prerequisite. Although the country has an obligation to satisfy the IMF, we must take into account the psychological, political, social and economic ramifications of any policy. The country has made some progress in the last few months. Of significance, we cannot afford to extinguish any of the gain we have realised so far.

During the budget debate 2014/15, Minister of Finance Peter Phillips introduced a new tax, a withdrawal tax, to be levied exclusively on the banks and not on individuals on 1st June. The amount to be derived from this levy is $2.25b to assist in plugging the gap in the budget. Proponents laud this levy as ingenious and simple, while opponents view it as an infamy on the vulnerable. In my view, it is a simple tax; however, it is generating hysteria among actual and potential customers. It seemingly is a timely reminder of JDX and NDX which reduced their deposits at the financial institutions. Possibly, some view this new levy as a haircut on their deposits in the banks, spawning a psychological shock, an endogenous shock among depositors. Ostensibly, the economy has been beleaguered for decades, so an imposition of new tax will harvest angst among depositors. Caution and sensitivity must be exercised so that the cost does not outweigh the benefit through the reversal of gains we have made so far.

A careful study of a business will reveal that the primary aim is to maximise shareholders wealth and to ensure its rate on investment, ROI, is attained. The fundamental objective is to maximise profit for its shareholders. On listening recently to the managing director of National Commercial Bank (NCB), Patrick Hylton he stated unambiguously that the bank is unwilling absorb the entire levy. He did not state specifically what extent of the levy that will be passed on to the customers. Demonstrably, Hylton, like any other CEO, is ensuring that NCB objectives are satisfied. All business people are typically stimulated by a culture of avarice. Incidentally, NCB has accrued an estimated profit of approximately $3b in the last quarter. Inevitably, the levy will be passed on the customers through increased fees.

I am imploring the policymakers to tax consumption rather than income. Let us pay keen attention to direct taxes and indirect taxes based on recent report by KPMG. According to the report, indirect taxes are becoming the "tax of choice" to boost state coffers worldwide. "The increases in indirect tax rates globally are arguably evidence of it becoming the choice tax for governments around the world seeking to raise much-needed income," said KPMG. Over the past 15 months, one in 10 countries has pushed up indirect tax rates, while none has lowered such levies. Indirect taxes are not directly imposed on income, but on the consumption of goods and services. Its attractions included its low cost of collection.

Revenue is required to provide public goods on a sustained basis. This category of goods is provided by the country for all. Examples are road infrastructure, public hospital, public schools, security, government service, street lights, and public water. Interestingly, these goods and service are enjoyed by everyone, whether one is tax compliant or not. As a consequence, an imperative is that policymakers should state explicitly that taxes must be paid to support the budget. Tax reform must be expedited to make companies and individuals not paying taxes.

I am providing some suggestions to improve our economy and enhance our tax collection:

It is an opportune time to be innovative by making the position of commissioner of tax to be a creature of the constitution. The incumbent can only be removed by the following reasons such as incompetence, bankruptcy, resignation, ill health, death and age. For decades, the perennial issue is that revenue is below the projection and tax compliance seems to be decreasing. Within this context, the position will be extricated from political interference, intimidation and pressure. This individual should be impartial and fearless in discharging one's responsibilities of collecting outstanding taxes. More importantly, the country should be told the total outstanding tax and the strategy to collect same. The present effort to collect outstanding taxes seems to be tepid and nonchalant. Undeniably, an improvement in our tax collection and tax compliance will lead to a concomitant improvement of our economy.

Government should conduct an audit on waivers granted to ascertain if companies are tax compliant. If companies are operating in breach of tax compliance, the waivers should be suspended until they become tax compliant. It is unconscionable to know companies are not paying their fair share of taxes but are receiving benefits from the country, at times amounting to billions of dollars.

I have consistently asserted that fresh thinking is required to find ingenious and innovative ways to grow the economy by wooing a new wave of entrepreneurs and investors to our shores. Based on information gleaned, New Zealand has been successfully wooing wealthy Chinese after Canada, a top destination. New Zealand Prime Minister John Key recently said he wanted mainland and Hong Kong investors to spend money not on land, but on fixed assets, manufacturing or real estate projects like hotels. New Zealand's "Investor Plus" policy allows those who invest NZ$10 million over a three-year period to gain residency. Applicants are not required to have English- language skills or business experience. In the past decade one million Chinese nationals have obtained permanent-resident status in Canada or America, placing Chinese migrants first in Canada and second in America behind Mexicans. It does not matter the number of immigrants, it will be big enough to make a consequential splash on our economy.

There is a number of initiatives which can more than sufficiently plug the gap in the budget. They are as follow: the legalisation of marijuana for medical purposes, the logistics hub, or rare earth. It seems that the budget is not predicated on any these initiatives. The projects have the potential to provide job creations, business opportunities, improvement in the balance of payments and increased GDP. As I ruminate, I ask the question, why are we delaying the implementation of any of these projects? Is the IMF in agreement with these initiatives? Something seems to be muddled.

It is unjustified to be requesting the compliant companies and individuals continue making sacrifices, while some remain non-compliant knowing that our economy desperately needs the revenue to finance the recurrent expenditure, capital expenditure and loan amortisation. The traditional paradigm of levying taxes on compliant individuals and companies should cease and be replaced by strategies to broaden the tax net with the aim of increasing the revenue. I am making a heady appeal to the policymakers, especially the Minister of Finance, Honourable Dr Peter Phillips, the acceleration of the tax reform is an absolute necessity more than before.

Some economists have declared that Government should not blink but to impose the tax, while a vast number of public has rejected this notion. As a pragmatist, the kernel of my argument is that the Government should review this proposal.

Should the Government stick to its position and implement this levy, will the effect be a gentle breeze or a gale force on the economy?

James McNish is a lecturer at the University of Technology, Jamaica. Comments: jamcnish@utech.edu.jm

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