THIS article will have been written, and sent to the editor, before the tax package and administrative/compliance measures are announced later today. It is therefore neither a critique nor an endorsement of any possible tax measures. As the article will appear after the tax measures are announced, the goal is merely to create the best possible context for thinking about the overall economic policy issues whilst still taking into account Jamaica’s limited options.

Firstly, it was almost inevitable, although unwel-come, that further tax “policy” measures would have been imposed yesterday. If the overall miss in tax revenues is roughly one per cent of GDP for the current financial year, a few billion more than in the revised budget, then even the to-be-announced tax measures will inevitably produce less than needed fiscal revenue in the next fiscal year, even if the new, more realistic budgeted increase is in fact met. The end result is that there is likely to be a continuing negative fiscal drag this year, which, although much smaller than the last two years, is still unwelcome in the context of our still depressed economy.

Secondly, although real non-debt expenditure is up only by a few percentage points, it is nevertheless this small rise that has necessitated the tax package. Most of the rise appears to accommodate the as-yet-determined public sector wage increases. This is not a comment on the fairness or otherwise of the eventual public sector wage increases just that it apparently requires increased taxation to fund.

Thirdly, if recent budgets are a guide, it is likely that the approach taken will be informed by what one would probably inaccurately call “political economy”, meaning an attempt will be made to appear to spread the burden more widely. The problem with such an approach to taxation is that whilst it may appear more fair, that is not necessarily the same thing as encouraging growth. Indeed, the balance can be very difficult, and much depends on the real world context rather than some theoretical model.

One idea mentioned in the media is to seek to collect the tax due on the interest from those US-dollar Eurobonds owned by Jamaicans. Most of Jamaica’s international US-dollar bond debt is owned by Jamaican investors, the famous “Jamaica bid”, and although some of the bonds were issued tax-free to local investors (the 2022’s are still outstanding), or are owned by tax-free entities such as pension funds, the assumption behind collecting such a tax would be that there are a number of local investors who haven’t accounted for the interest, unlike in the case of local deposit or repo interest, which is withheld at source.

In adopting such an approach, one would have to consider the law of unintended consequences, meaning whether this would impact the ability of Jamaica to raise money internationally, as investors are interested in their after-tax returns. The assumption may have been made by local investors that Jamaican Eurobonds were tax-free, as indeed some instruments were. So if the tax is enforced, a possible assumption would be that we were going to borrow mostly from foreigners going forward. In any case, most of the bonds are likely to have been held directly by local financial institutions as backing for their US-dollar repo books, so the amounts to be collected may be less than expected.

Another idea apparently being considered is to finally implement long-awaited rules on transfer pricing, catching those companies who might be reducing their tax bill locally through non-arms length transactions abroad.

This is a very complex subject, as there are literally dozens of ways to do the calculations, which may have wide and far-reaching implications for the companies involved. A whole article would just touch the surface of this topic, but a good place to start would be the excellent lunchtime speech of Ernst and Young’s Alison Peart at this year’s Jamaica Stock Exchange conference.

Suffice it to say, such measures would need to be implemented very carefully, with the best possible international taxation advice, and preferably after deep consultation with the multinationals potentially affected. Dr Carlton Davis’s book on the bauxite industry situation in the late 1970s may be a useful case study in thinking again about unintended consequences.

Both of these measures could be put in the category of compliance, and coupled with perhaps some sin taxes may look like they are sufficient to fill a potential hole, presumably targeting those with the ability to pay. However, both have a degree of uncertainty attached to them, with so far unknown impacts on finance and investment.

Understanding completely the extraordinarily difficult job in raising revenue that the minister of finance has in an over-indebted country like Jamaica, one could ask whether there are other areas of taxation that might be more fruitful in the short-term.

Tax on gasolene

The obvious area that has probably been looked at and discarded is a tax on gas, in this case seeking to capture some of the fall in the price of oil, not an increase but “an energy equalisation tax” for the government coffers, as well as perhaps funding, say, an option premium to lock in current low oil prices. This would be the most effective measure, from day one, in catching the supposed 40 per cent informality of the economy, as well as making people who drive large cars pay more than those who walk.

The most important area of compliance is Customs, where for decades the formal private sector has estimated revenue losses in the tens of billions per annum, and where entire product markets have existed downtown in imported items where the product is sold at less than the formal distributors’ landed cost. But to deal with this issue would be a very serious affair, requiring effort way beyond just sending a tax inspector to an air-conditioned office in an already largely compliant business.

Indeed, for a long time, some have believed that only through bidding Customs internationally as a “concession”, to a leading international firm specialising in managing Customs with a very strong security component, would one be able to make real headway.

What is undoubtedly true is that if one is serious about compliance, the fact that Jamaica is an island, and imports nearly everything we consume, is the place to begin. The impact of such an effort would be doubled through ensuring everybody is issued a legible GCT receipt for everything they buy.

One could also consider changing the basis of property taxation to improved value, in return for greater services in areas such as garbage collection. However, the current property tax, and the rebased values, should first be collected, as buildings can’t move.

As yesterday’s Jamaica Observer editorial noted “Recession is nothing to rejoice about.” The sooner we start to do the really tough stuff, the sooner we will get to five per cent economic growth.