In his Parliamentary presentation on behalf of the Private Sector Working Group (PSWG), Joseph Matalon emphasised that the PSWG tax reform proposal should be viewed, and implemented, as “a package”, as “nobody likes to face more tax.” He further argued that the proposed reforms should be judged on their impact as a whole, as “coherence was the sweet spot of reforms”.

Noting the “asymmetry of power between the government and the private sector”, Matalon observed that “if the government in its wisdom decided changes are needed”, he was asking that “those changes do not do violence to the proposal as a whole”. He noted that the “numbers” in the proposal, meaning the size of the proposed net tax package, was based on an expectation of the fiscal situation that may not be valid.

In an important aside, the committee chair, Finance Minister Peter Phillips, observed that, “in time past”, when the government looks at tax reform, they have “taken the revenue without looking at the growth component”. He also noted “the challenges facing us”, referring to getting acceptance of the proposal, “will revolve around the buy-in mechanism”. He revealed that was “Why he always said Parliament needs to accept responsibility” for taxation as “Every parliamentarian wants expenditure” but only the Minister of Finance is responsible for funding it. Referring to expenditure financed by debt, he stated “That option no longer exists”.

With respect to the personal income tax, the PSWG proposes the introduction of a new “progressive”, more complex marginal relief system at a lower initial rate of 15 per cent for incomes up to $1.1 million, combined with a new employment tax credit scheme. Their modelling suggests that 267,000 PAYE wage earners would enjoy lower combined personal income and payroll taxes, split between a reduction of approximately $2.8 billion in wage earner liabilities (with the net cost reduced to approximately $1.9 billion as the higher wage earners would pay approximately $900 million more), and approximately $1.1 billion in reduced employer payroll taxes for lower income earners designed to provide incentives for new job creation, although this would have an overall positive revenue gain of $171 million due to the removal of the salary cap on which these deductions are applied as part of a consolidation into a common base. Their modelling suggests that the combined effect of the income tax and GCT proposals would mean that all but the higher income PAYE earners would be better off.

Corporate income tax was to be reduced to 15 per cent (an aggregate of 25 per cent including the re-imposition of a 10 per cent dividend withholding tax), except for a group called “highly regulated entities”, who collectively contribute 67 per cent or $20.1 billion of total 2010 corporate tax revenues of $31 billion. These entities, mainly in the financial sector, regulated by the FSC (and certain entities regulated by the OUR), had agreed to continue to pay the 33 1/3 per cent rate for a transition period. The halving in the corporate tax paid by non-regulated entities, from $10.9 billion to $5.4 billion, or a reduction of $5.5 billion, would be reduced by the imposition of a minimum business tax. This business tax of the higher of 0.5 per cent of revenue, or $100,000, was projected to bring in $2 billion, thereby reducing the net cost of the corporate reform to $3.5 billion, or 11.3 per cent of the tax take. The economic modelling undertaken with the help of the Inter-American Development Bank suggested that the revenue loss of $3.5 billion would be translated into a revenue gain of $6.5 billion (a swing of $10 billion) within three to five years.

In return for the reduction of corporate taxes, the PSWG is advocating the elimination of all discretionary waivers, and the cessation of a wide range of incentives, with existing incentives allowed to expire (grandfathered). Asked if he had not done some work on the current cost, Matalon referred to the work of the 2004 committee, which he chaired, as having estimated tax expenditures as 30 to 40 per cent of total taxes.

Mr Karl Samuda asked Matalon if there were any examples in our region of countries with no incentives, or that had removed their incentives. Matalon replied that although incentives were being de-emphasised regionally, there were no countries that he knew of, but argued “this hurdle is as important as basic foods”.

He argued that for the tourism sector, getting one’s capital and operating inputs free of duty “by statute” would “go a long way to compensate for the removal of incentives”, and would be particularly meaningful when combined with a corporate tax rate of 15 per cent.

Mr Samuda noted that the rate of GCT paid by the tourism sector was one of the highest in the region, and asked if it might be possible for smaller hotels to pay a lower rate of GCT, perhaps zero to five per cent to “give them a chance”.

Mr Matalon argued that the proposed very competitive headline corporate tax rate would allow our investment promotion agency to say Jamaica was “open for business”, and that other issues, such as a trainable labour force, were more important than the tax rate.