This article was written election morning, to be published after the election, and is not designed to address specifically the promises of the party manifestos, or the track record of either party. Indeed, now that the election campaign has ended, the goal is for this piece to be the start of a conversation on some selected policy issues which a new Government of whatever colour will face, in an academically neutral fashion.

As Richard Byles correctly reminded us at the last Economic Programme Oversight Committee meeting, manifestos are just promises, suggesting that he will comment as appropriate when proposals are turned into policy. The International Monetary Fund (IMF) — and Private Sector Organisation of Jamaica — has taken a similar path, thereby leaving themselves out of the election campaign — an approach that should find favour with some.

Personal Income Tax

The first issue is personal income tax policy, which appears to have dominated the campaign. Various proposals have been made (by the Opposition), or resurfaced (eg Private Sector Working Group [PSWG]), which, as they have been covered elsewhere, I will not repeat here. I would note, however, that the PSWG tax document is a very impressive piece of work, with its authors (and others involved) having taken great pains at considerable personal cost in time and effort to get right, for which they should be again commended. It would be an extremely useful starting point for any new round of comprehensive tax reform, as would the much more detailed 2004 tax reports prepared by Professor Roy Bahl, and summarised by the same author in a later 2007 book for the Planning Institute of Jamaica (PIOJ).

The heated nature of the election campaign has meant, however, that the issue of the correct tax system has been somewhat confused with that of social equity. There is definitely a strong case to be made for a better sharing of the costs and benefits of the adjustments brought about by the fiscal consolidation under the IMF programme. Viewed broadly, some economists have argued that those costs (currency depreciation, tax increases for PAYE taxpayers, job losses, cutbacks in Government of Jamaica financing of public services and infrastructure, etc) have hit hardest the most vulnerable at the bottom of the income and wealth ladder (ie those persons least able to hedge against or mitigate the costs). Some combination of tax relief and subsidies for those at the bottom of the ladder — other things equal — would certainly be an appropriate way of going about trying to address this issue. The key, however, is the exact mix of tax and subsidy.

One assumption behind both of the two tax proposals first mentioned is that any form of tax relief at the bottom would have to be matched, at least in part, by corresponding tax increases at the middle and top of the PAYE distribution and/or by increased compliance. I would argue, however, that rather than targeting middle or upper income PAYE earners to pay for a break for lower income earners, a better approach would be to target the much larger pool of income earners (all the labour force), spreading the cost, and in the process effectively offsetting any gains the higher middle and higher income earners would get (from, say, raising the threshold) if that is the social equity approach desired.

In short, I still believe that overall the current flat tax system, with a single tax rate plus a threshold, is the best approach; from a position of efficiency and simplicity. Having both personal and corporate tax at the same rate, currently 25 per cent, and hopefully lower in the near future, avoids the issue of “income shifting” that we have seen in the past when the two rates diverge. It is also an advantage in a country with such a small number of PAYE taxpayers as a percentage of the total labour force, a relatively uneducated population, and such a large informal sector, to make taxation as simple as possible. I would submit that the whole taxation process has become increasingly complicated and is threatening to become much more so — the exact opposite of where we need to go at our stage of development. Any proposal that makes the situation more complex is, therefore, less desirable.

It is also clear that the income tax threshold is far too low. In the mid-1980s, the then chairman of the tax reform committee thought that the threshold should be the equivalent of a minimum of US$5,000 (others can do the calculation as to what this would be in today’s dollars) coupled with a 25 per cent tax rate. The reason this threshold and tax rate were not chosen at the time was concerns over revenue. The problem is how to finance tax relief for lower earners with a flat tax, when it is estimated that every $100,000 rise in the threshold costs over $3 billion, or a total of just under $32 billion to raise the current threshold to say a $1.5-million target. I would argue that the latter target is both possible and achievable, but in the interest of fiscal prudence it should be a multi-year goal and tied (indeed it should be the main plank) of the renewal of the Partnership for Jamaica agreement, which expires in July, for between another two and four years. Such a “partnership” approach is particularly relevant because of the very high percentage of total PAYE represented by public sector employees.

Financing a PAYE threshold move

In looking at how to finance such an increase in the threshold, the first thing to note is that there are now far more cars on the road than PAYE earners in total. Putting another $25,000 per year licence fee on the top 15 to 20 per cent of cars owned by value might bring in $1.5 billion to $2 billion, and would get a much wider set of higher income earners than those reported in PAYE. This could usefully be combined with somewhat lower Customs duties on cars, appropriately modelled, as the purpose is not to discourage car ownership overall.

Similarly, an increase in taxation on higher-end real estate could be carefully calibrated to offset any gain to higher income earners from the rise in the PAYE threshold, thereby automatically spreading the cost over a much larger number of higher income earners than the tiny number currently recorded as PAYE in the higher deciles. Again, a reduction in transfer or other real estate taxes, eg stamp duty, might be part of the package, lowering transactions costs and thereby creating more activity at just the right time to take advantage of Jamaica’s new potential for credit creation as a result of the recent liquidity infusion. Any comparison of the amount of owners of higher end housing, or luxury cars, with the supposedly much, much lower number of higher-end PAYE taxpayers that should be those able to afford such items, suggests that this is an eminently reasonable approach.

A more radical approach, allowing a quicker rise in the threshold, would be to also implement a carbon tax modelled on its success in the Canadian province of British Columbia. Whilst this requires a much longer discussion, over a four-year period, this province gradually increased taxes on carbon, and legally mandated itself to give all the money raised back to taxpayers and businesses through a reduction in personal income and business taxes, as well as financing increased welfare through direct income support. Such an environmentally friendly policy would perfectly dovetail with the global preparation for the coming shift from oil in the 2020s.

What about the budget?

All of this assumes that any tax change must be fully financed, but this is to take a rather narrow view of the issue. What needs to be more fully examined here is the broader issue of the composition of the budget and sequencing of adjustments, given the overall budget constraint. In other words, we need to take a more holistic and integrated view of the budget. I would argue that a carefully crafted restructuring and reprioritising of some budget items on the expenditure side would also provide more room for tax relief and expenditure benefits for those at the bottom.

Some of the factors to consider are: (1) windfall gains to the budget from an exogenous decrease in price of oil; (2) public sector wage adjustment; (3) restructuring of the public sector pension scheme; (4) the planned reduction in the primary surplus target which is already approved under the existing IMF programme. This would require, however, a full review of the existing budget, which has no doubt already been crafted and is just waiting for the completion of the election to be released. It is unlikely such a review could be accomplished in the short time remaining before the budget must be released by law, so the earliest possible date for a substantial change should be July 1, and preferably January 1, to allow such a review to include that of tax policy generally.

Finally, no decision should be made without looking again at the whole issue of how to achieve faster growth, as referenced in a recent IDB report on Jamaica’s debt dynamics, starting with a review of the 2011 PIOJ growth-inducement strategy prepared by Stanford professor emeritus, Donald Harris, as well as the more recent growth policy also prepared by the PIOJ last year.

Both manifestos claim to address this issue, but are not costed, and the absence of a debate means that we do not have even this limited evidence of both party’s true priorities. The core question is the likely impact of any of the measures previously proposed (taxation, growth strategy) on the growth of the economy, eg on aggregate demand and incentives for savings, investment, and productivity. What a more balanced, comprehensive and integrated view of the policy mix and overall growth strategy being pursued by Government of Jamaica should look like will be the subject of later articles.