Jamaica's neoliberal agenda and trickle-down economics? – Part 2

Will it work?


Thursday, March 21, 2019

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In Part 1, published on Monday March 18, 2019, I discussed the concept of neoliberalism (which is the economic framework within which the fiscal policies of the Government are being administered) as well as the specific policy of giving tax breaks (which I have described as “trickle-down” economics). In Part 2 I will explore the question of whether trickle-down economics works.

Kimberly Amadeo (2018) examines the history of trickle-down economics going back to the 1980s when President Ronald Reagan and his neoliberal partner Margaret Thatcher promulgated the doctrine and practice of trickle-down, nuanced as Reagonomics and Thatcherism, whose policies were continued by their successors. In all instances, the economic stimulus was designed to end recessions. Amadeo concludes that trickle-down economics in its pure form was never tested, as it was likely that it was massive government spending which ended the recessions. Thomas Del Beccaro (2018) agrees with Amadeo, but goes further. Whereas Amadeo says trickle-down economics has not been tested, Del Beccaro says it does not exist.

Mark Thoma (2017) has echoed similar views to that of Amadeo and Del Beccaro. In his paper published by Moneywatch Magazine, entitled 'Not just any kind of tax cut can boost economic growth', Thoma argues that the Reagan and Bush tax cuts had little, if any, impact on economic growth. He contends that policies which encourage households to save more, such as tax breaks which encourage (or even force) people to save towards retirement, are likely to have a greater chance of stimulating economic growth.

The Inter-American Development Bank conducted a study on savings in Latin American countries and found that the more citizens save, the less dependent a country is on external capital to finance development, and thus the more sustainable economic growth in those countries will be. Thoma adds that measures which strengthen the security of lower-income households are also to be preferred to making massive tax cuts to the rich. Alongside these reliefs to the poor and middle class would be increased support for research and development, reducing the cost of higher education, and improving the quality of schooling generally. These measures will not have immediate impact but in the long run they would be far more sustainable.

While making tax cuts to the lower- and middle-income earners in ways which promote savings can have the effect of strengthening a country's economy over the medium to long term, Danielle Kurtzleben (2015), in a piece entitled 'Do tax cuts grow the economy?' makes the simple and compelling point that if a rich person gets a $100 tax break he or she is likely to save it, thus there is no immediate impact on the economy, but if the low- or middle-income earner gets that additional $100, he or she is likely to spend it, thus spurring increased economic activity which is likely to result in economic growth.

The result of the trickle-down tax cuts has been the widening of the income inequality gap, which the USA witnessed. According to Amadeo, between 1979 and 2005, after-tax household income rose by six per cent for the 20 per cent of the population at the bottom, whereas the top 20 per cent saw an increase of 80 per cent, with the top one per cent experiencing a tripling of their income. This was real “prosperity” for those at the top. The same is happening under the Trump tax cuts.

Corporate tax cuts seem to have had an overall positive impact on the Canadian economy, however, when compared to the USA. Mathieu Bedard and Adam Michel (2018) contend that one of “the most underappreciated Canadian economic success stories … is the sustained reduction in the federal corporate income tax rate from 2001 to 2012”. They highlight that despite the fact that corporate taxes were halved over the period fiscal revenues generated by the tax did not diminish, more businesses invested, the economy grew, and wages increased. The critical difference between the Canadian experience and that of the USA was that the cuts were gradual, taking effect over a dozen years rather than immediately as in the case of Jamaica, with transfer tax, for example, being cut by 60 per cent in one slash, or in the case of the USA which cut corporate taxes from 35 per cent to 21 per cent. The arguments put forward by Bedard and Michel are in an article, entitled “Canada's Corporate Tax Cut Success: A Lesson for America”.

Two important elements of the Canada experience that ought not to be overlooked, in addition to the gradual implementation of the cuts, wide distribution of the cuts and the sustained investment in social services.

Thus, the question as to whether Finance Minister Nigel Clarke's version of trickle-down economics will work is yet to be seen. The $14-billion tax cuts are not the first in Jamaica's history. Governments over the years have given various incentives to businesses. We have some very definitive metrics by which to judge whether Jamaica's version of trickle-down economics will work. The current rate of unemployment is 8.7 per cent, and the rate of gross domestic product (GDP) growth in the third quarter of 2018 was 1.10 per cent over the previous quarter. Having backed away from five per cent per annum growth, the Government has set a new target of two per cent per annum. Given these baseline data let us see what impact trickle-down has.

Benefits to small businesses and the working class

While I have fundamental suspicions about the efficacy of the tax cuts on the economy, I acknowledge that some of the measures announced by Clarke will benefit the poor, the middle class, and small businesses. But the benefits to these categories may be likened to the difference between a slice or hunk or bread versus a pinch or a crumb within the totality of the measures.

Among the measures that will help small businesses and the poor are the increase in the GCT threshold from $3 million to $10 million, (a move Peter Bunting suggested in his 2018 sectoral presentation). Similarly, the abolition of the minimum business tax of $60,000 per year, which was applicable to all businesses will also help the struggling entrepreneur. These two measures combined ($731 million + $1.093 billion) will see Government giving up under $2B to small businesses. The replacement of the ad valorem tax with a flat fee of $5,000 per document will help the ordinary citizen who borrows, but a significant amount of the $6.65 billion here is for large corporations.

Other ways?

If the $1.5 has not had the effect of stimulating economic growth and if one may reasonably question (using a large body of data from other countries) whether the tax cuts stimulus will work, we are left with the question: Is there a better option?

In my view these historic cuts should target the strengthening of the social and economic structures of the society. This could be done in a number of ways including through the provision of more scholarships, increasing the amounts allocated to research and innovation, as well as increasing the allocation to the Students' Loan Bureau, above and beyond what has been allocated, supporting vulnerable communities, tackling crime long-term through involving more youth in training and employment. This would mean, for example, tripling the number of youths in the LEGS programme, resuscitating the Montpelier Training Camp, and improving schools, colleges, and university resources.

In my opinion, after a whopping $32 billion in taxes in its first year-and-a-half in office – which was used to finance the $1.5 million tax-free threshold (which we were told would be financed without increasing taxes), if the Government really wanted to help most of the people it would have removed the tax on fuel which was imposed (by the PNP) to finance the hedge, given that Clarke discontinued the oil hedge. This would mean a cut of $7 per litre on fuel and would benefit everybody. One way in which this hedge tax could be used is to use the portion collected since 2016 to increase funding to higher education.

Further, the Government should reduce GCT. Can you imagine what it would mean for you if GCT were to be cut by 2.5 percentage points or more? All this while giving breaks to small and medium-sized businesses.

Dr Canute Thompson is head of the Caribbean Centre for Educational Planning, lecturer in the School of Education, and co-founder and chief consultant for the Caribbean Leadership Re-Imagination Initiative, at The University of the West Indies, Mona. He is also author of four books and several articles on leadership. Send comments to the Observer or canutethompson1@gmail.com.

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