In a recent speech to the Private Sector Organisation of Jamaica (PSOJ), the new head of the Planning Institute of Jamaica, Gladstone Hutchinson, noted that “Tax reform has failed in Jamaica because it has been driven by the need for revenue maximisation.”

It was extremely refreshing to hear this being said by a top government technocrat. This point has long been understood by the private sector. In the words of my late father (reflecting on his experience as Chairman of Jamaica’s tax reform committee in the 1980s), “successful tax reform requires a fiscal cushion to help even out the winners and losers.”

Since the 1980s, nearly every source of revenue identified to finance tax reform (often by members of the private sector) has instead been used to plug a fiscal gap. Amongst the most recent examples are the tax on gas, indentified in the Matalon report of 2004 as a way to finance a growth creating tax reform but instead used to plug the gap in the 2009 budget, and the advance GCT at the Port, identified to help level the playing field between formal and informal importers by replacing the growth destroying import cess (effectively another duty), was instead used to plug the gap in the tax package required for the IMF programme at the end of 2009.

In every case, delay in taking action early enough has meant that the policymakers are always behind events, merely increasing taxes in an apparently vain attempt to catch up with our ongoing fiscal crisis.

On the issue of incentives, my father always used to say that “the need for incentives almost always means that the tax rate is far too high.”

A classic example is the importation of cars. Every car imported still requires a licence, and it is easy to understand why car buyers demand a break, termed “concessions”, when, according to the president of the Automobile Association Mr. Kent Lacroix, $1 spent on the cost of a car can require up to another $1.79 spent on import duties and other taxes in an industry where we have no local production to protect. This punitive rate of import duty, means, unsurprisingly, that, according to Mr. Lacroix, over 50 per cent of new cars are sold on a concessionary basis, much of them to government employees. He advises that we are now facing the third year of declining sales, which have fallen by over 50 per cent since 2008.

Both political parties implicitly recognise that duties are too high, as during every election campaign we see them import a large number of cars on a concessionary basis to run their campaigns. All this would not be necessary if we had a uniformly low rate of duty, say 10 per cent, with perhaps a slightly higher rate for environmental reasons e.g. very large cars. This would have the additional benefit of eliminating the incentives for corruption.

For decades, Jamaica’s location (air and shipping lanes) has meant that it had the opportunity to become a distribution centre for the region, rivalling Panama. At the end of 2008, members of a Chinese delegation to Jamaica, asked how we could achieve this, advised us “to learn from Panama”. Even now, Jamaica could create a huge duty free, distribution and transhipment business (we have a very limited business currently). This could only work, however, if there is a very low differential between the “duty free” international business, and product sold domestically, say an import duty of about 10% , which does not include our relatively high rate of GCT. Because we would be supplying the region rather than just ourselves, import economies of scale should have the additional benefit of allowing much better prices for many products for the local market.

What applies to import duties also applies to corporate taxation. A high cost country such as Jamaica currently requires a lower corporate tax rate to compete internationally for investment. It is no accident that very high cost Cayman has no income tax, as otherwise it would just be a barren rock and not one of the world’s wealthiest countries (although even its low taxation is no longer compensating for rising costs). Very competitive countries gain the ability to increase the level of taxation to provide their citizens with services (the “tax price” of the provision of government services in the words of our new PIOJ head), as the world’s developed countries did in their own processes of industrialisation. In a flat world, where international prices converge, no international consumer will pay for a high proportion of domestic taxation in the price of the product he is buying. Indeed, many of the most successfully industrialising countries, such as China, have actually subsidized exports as part of their development drive.

Moreover, a demand deficient economy such as Jamaica, which needs to attract new serious long term investors to drive growth (through perhaps an investment conference), must at minimum be able to tell them what their taxation policy will be for at least ten to twenty years in advance. The corporate tax rate better not be anything close to 33 1/3 per cent, or in today’s world they won’t even take our call. This makes it critical that the issue of incentives and the wider issue of the corporate tax rate be dealt with immediately to avoid Jamaica falling further behind. All this requires extraordinary leadership and political will to make transforming the economy job number one by “taking a chance on tax reform”, finally getting ahead of the admittedly very difficult world economic crisis. The alternative is likely to be increasing economic stagnation, with the crisis worsening to the point where it becomes comparable to that of the 1970s.