On May 12th the government will announce the tax measures required to finance the budget. Of most interest to the man on the street is how the government will finance their election promise to raise the personal income tax threshold to $1.5 million.

In an e-mailed response around the time of the election, former Stanford Professor Donald Harris advised that, in assessing whether the $1.5 million tax threshold increase could be financed, we would need to examine “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 International Monetary Fund (IMF) programme.

“The core question is the likely impact of any of the measures previously proposed (taxation, growth strategy) on the growth of the economy, such as on aggregate demand and incentives for savings, investment, and productivity.”

One excellent example of what such a reprioritising could look like is the report just released by the Caribbean Policy Research Institute (CAPRI) ‘An assessment of the National Housing Trust’.

The report notes that the Trust’s main source of financing is a “tax” levied on employees, defined as all persons earning minimum wage between ages 18 and 65, at two per cent (refundable), and three per cent (non – refundable) of salaries paid for by employers. Combined, this is an enormous five per cent of wage income.

Non -refundable contributions are projected at just under $15.6 billion for 2016/2017, while “capital” contributions are projected at just over $11 billion, with around $4.6 billion of that expected to be refunded.

CAPRI’s paper recommends that “NHT contributions should be reduced from the current five per cent to two per cent of the wage bill”.

If the $15.6 billion employer contribution was diverted to the consolidated fund, this would, according to CAPRI’s :sustainability analysis, not affect NHT’s financing ability as NHT’s capital would continue to increase from just over $200 billion to $334.8 billion in the 10 years to 2025, after a slight dip in 2016 — no doubt because this is the last year of the four-year $11.4-billion grant.

While the whole issue of the NHT deserves a much longer discussion (see the report), CAPRI’s bottom line is the same as myself and Colin Steele’s in a Gleaner article ‘NHT’s relevance as mortgage financier’ on July 27th, 2007, namely that “There is clearly a case for an institution to help low-income earners who cannot obtain mortgage loans from the private sector to purchase their own homes, but little justification for NHT providing mortgage financing for middle-income earners who can readily be financed by private sector lenders.”

We went further, saying with low interest rates “No longer should taxpayers be forced, through statutory payroll deductions, to lend their money to the NHT.”

Having just returned from the Caribbean’s Washington energy summit with the US Government, which included the issue of global warming, Prime Minister Holness should also now be in an excellent position to implement a “green” carbon tax modelled on its success in the Canadian province of British Columbia.

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.

TRINIDAD OIL

The prime minister should begin the process by simply demanding that Jamaica immediately stop paying roughly 10 per cent more for refined petroleum products from Trinidad (clearly unfair and against the spirit of Caricom) which is solely due to their ability to increase prices because of the existing common external tariff of 10 per cent.

If we import roughly US$700 million in refined products from Trinidad, then 10 per cent is roughly US$70 million, or say around $8.4 billion if we use a $120 to 1 dollar for conservatism. The same level of taxation could now therefore be applied as a carbon tax, without raising prices.

Including employer NHT contributions, we have now raised $24 billion, without so far increasing taxation on Jamaican consumers.

As a carbon tax could not legally be applied just to imports from Trinidad, if it was applied to all oil or all equivalent imports, it would probably raise at least another $8 to $12 billion, or say $32 to $36 billion in all.

The minimum $32 billion raised would be just enough to finance a straight rise in the threshold to $1.5 million, without destroying the coherence of the current tax system, while the balance could be used to help finance the issue of the additional cost of the other statutories, and perhaps a more generous education budget to compensate for the abolition of cost sharing.

If additional revenue is needed, putting another $25,000 per year licence fee on the top 15 to 20 per cent of cars owned by value might bring in around $1.5 billion to $2 billion, and would get a much wider set of higher-income earners than those reported in Paye As You Earn (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, such as 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 whoshould be those able to afford such items, suggests that this is an eminently reasonable approach.

GCT LOTTERY

Finally, a bank transaction tax could again be considered, perhaps as a temporary measure, as long as it did not interfere with the banks’ computer systems, or increase administration complexity for the consumer. Whilst not particularly attractive from a long- term point of view (the whole point of the Jamaica Labour Party’s manifesto is to achieve faster economic growth), it could be used to ensure the IMF targets are met.

There is also a case for a reform of GCT — but a low-hanging fruit here, as proposed by Chris Issa at the recent

Jamaica Observer luncheon, would be to sharply increase the productivity of GCT through using the power of mobile phones. The idea would be to encourage everyone to take a picture of their GCT receipt, which could then be entered into a Government lottery, entitling the winners to regular prizes.

In Slovakia, this increased GCT receipts by US$120 million as the Government was now able to track who wasn’t paying their correct GCT, raising its productivity by 10 to 20 per cent.

The ideas mentioned here are in no way exhaustive, example they exclude increasing departure tax on tourism, and show what the power of consultation with the private sector, tax experts and policy analysts could achieve.