PRIVATE Sector Organisation of Jamaica (PSOJ) president Joseph Matalon used a recent speech on tax policy for the Incorporated Master-builder’s Association of Jamaica (IMAJ) to update his audience that the PSOJ, together with a broad cross-section of colleague business associations, had been meeting regularly over the past weeks and months to formulate a united private sector response to the Green Paper on Tax Reform. Importantly, he observed that, through the Partnership for Transformation and the IDB, and with the cooperation of the Ministry of Finance and the PIOJ, technical support had now been provided to allow modelling of the economic and revenue effects of any proposed package of reforms.

He observed that it should be no surprise that in its latest Country Memorandum, the World Bank suggests tax reform as a critical action to remove what they identify as one of the primary “binding constraints” to economic growth in Jamaica, or that tax reform should be an issue of great concern both to the IMF and the Inter-American Development Bank in their ongoing review of Jamaica’s Medium-Term Economic Programme.

In Matalon’s view, there are three critical questions that the current reform effort must answer, namely, how to deal with tax incentives and waivers, addressing the disproportionate share of the burden of direct taxes on income that is borne by PAYE wage earners, and whether to pursue social welfare policy objectives through tax policy.

Matalon quoted from a recent article by Pricewaterhouse tax expert Brian Denning that, “Stakeholders within sectors which currently enjoy tax incentives (eg tourism, manufacturing, agriculture, export) will typically argue that they should continue to be incentivised and that this is critical to their survival. In contrast, stakeholders in non-incentivised sectors typically complain [with some merit] that they are consequently called upon to bear an excessive and disproportionate share of the overall tax burden in an effort to meet the tax revenue demands of the country.”

Matalon argues that Jamaica needs to broaden our tax base as much as possible, with lower rates of tax uniformly applied across all goods and sectors of the economy, so as to provide a much simplified tax regime that is, therefore, easier to enforce and less prone to corruption.

How to achieve Matalon’s proposal is something that still needs to be worked out. In the original tax reform the 1980’s, the then chairman of the committee actually proposed that Jamaica move to a standard 25 per cent rate of corporate and personal income tax (meaning that one would be indifferent between personal and corporate income tax), as opposed to the 33 1/3 per cent actually chosen. This would have been a fairly competitive rate at that time. However, in the 20 five years that has passed since that reform, the standard rates of personal and income tax have fallen in many countries, including those of our key Caribbean competitors. Barbados and Trinidad have already reached rates of corporate tax of 25 per cent, are now in the process of trying to lower them further to compete internationally, and already have aspects of their corporate tax systems that make them even more competitive than their headline 25 per cent rate relative to Jamaica. In Brian Dennings’ “Blueprint on Tax Reform” document, prepared as part of the National Planning Summit initiative (now subsumed into the Partnership for Transformation), a “competitive” tax rate that can readily attract international investment is reckoned to be somewhere between 10 to 15 per cent.

Matalon also asks how to provide greater equity in our system of taxation on personal income, where a disproportionate share of the burden is borne by PAYE wage earners who suffer a marginal rate of tax of 25 per cent above an income tax threshold of J$441,000, or US$5,000 per annum, in addition to a myriad of payroll taxes at varying rates. Taxpayers with lower incomes face relatively high effective rates of taxation, an inequity magnified by significant non-compliance on the part of self-employed taxpayers. He argues that fiscal space must be found to redress this inequity by substantially raising the level above which income is subject to tax. It is noteworthy that 25 years ago, the original committee thought a much higher tax threshold (in nominal US dollars) should have been put in place at that time, which would be worth much less now.

Although Matalon doesn’t specifically say so in this speech, a much higher, fairer tax threshold, coupled with a corporate tax rate designed to drive job creation, has to be at the heart of any social contract between government, unions and the private sector. This would include efforts to improve compliance among self-employed taxpayers, so that over time more income is brought into the net, and tax rates can be reduced to more competitive levels that increase incentives for work and foster greater productivity.

Finally, Matalon addresses head-on the difficult question of whether we should continue to use the tax system to promote social welfare objectives. He observes that currently GCT exemptions are granted in order to contain the retail prices of a wide range of basic foods and other so-called “sensitive items” in the interest of protecting the poor and vulnerable in our society who consume these products, an apparently laudable policy.

However, he argues that studies by our own Statistical and Planning Institutes have demonstrated, by reference to the consumption patterns of these products across the various income classes, that for every $100 of revenue that the Government gives up by exempting basic foods from GCT, only approximately $14 actually benefits the poorest 20 per cent of our population. In fact the same studies estimate that the benefit of these exemptions to the wealthiest 20 per cent of the population amounts to $26, almost twice the level of benefit enjoyed by the poorest 20 per cent of the population. Matalon’s clear implication is that a large increase in the current social security net, particularly the PATH programme (which a recent World Bank study reveals has an administrative cost level of only 11 per cent), would be a much more efficient way of reaching the poorest in Jamaica.

BO