A tax policy is not solely a vehicle for a Government to garner revenue, it’s also an instrument of social control and a mechanism for addressing market failures. In light of this, the recently announced new taxes on petrol, cigarette and air travel by the Government ought to be welcomed, as they account — or at least begin to account — for the external costs associated with the consumption of these goods and services, that is the emission of greenhouse gases and mal respiratory-related particulates.

This should apply irrespective of whether the introduction of the new taxes causes the prices of complementary goods and services to increase. Such increases would merely be correcting price distortions by internalising the externalities.

At this point, it is worth noting that my argument speaks solely to economic efficiency. However, I am well aware that economic efficiency can sometimes conflict with social justice imperatives, which ought to be an equally important dimension of any tax policy consideration. Often, a careful balance must be struck.

Income tax has long been the most prevalent and principal mean by which governments across the globe earn revenues to fund their activities, however, this tax on labour — which is essentially what income tax is — is arguably a perverse tax measure, since fostering employment is usually a desired goal of governments. From an economic perspective, labour growth is a key driver of economic growth, as the Solow growth model, for example, identifies; while from a social point of view, employment is paramount to ensuring a fair distribution of resources within a state.

This equitable distribution of resources is, in turn, crucial to enabling all the citizens to meet their basic needs. Additionally, employment fosters social contacts, heightens self-esteem and leads to a higher quality of life — ie, it enhances the general social fabric.

The Government’s newly appointed Economic Growth Council (EGC) has aptly set an annual GDP growth target of five per cent. No doubt, the EGC would be cognisant that successfully accomplishing this economic trajectory would require appreciable growth in the country’s input factors of production – that is, labour and capital. Most importantly, the council would be well aware that it is how efficiently and intensely these input factors are utilised in the country’s production, that is the total factor productivity (TFP), that has been the country’s main challenge over the past three decades, and is perhaps the area that should be given greatest priority.

As IMF data reflect (see chart), Jamaica’s labour grew annually about 1.5 per cent between 1990 and 2002 and one per cent between 2003 and 2012, while its capital grew annually roughly one per cent and 0.7 per cent respectively over the same periods. On the other hand, the country’s TFP declined annually by about 0.8 per cent between 1990 and 2002 and 1.2 per cent between 2003 and 2012, offsetting the overall input factor growth, hence resulting in low GDP growth. This contrasts sharply with Trinidad, for example, where annual TFP growth during the same periods were 2.0 per cent and 2.1 per cent respectively, contributing to that country’s much higher GDP growth (see chart).

How do we reverse the country’s adverse TFP trajectory — its technological dynamism — you may be asking? Well, my view is that the solution may require applying stringent regulation to industries. This may seem radical and counter to the Government’s posture to court investors, but, of course, the two things need not be mutually exclusive. Let me expound on this.

It is well established that regulation can provide the motivation for stimulating technological innovations. In fact, the most significant driving force for technological change reported by business managers is environmental legislation and the enforcement of health and safety labour standards.

However, if the regulation is slight, the innovation will generally be incremental, which is often labour saving in nature (example, due to cost-cutting measures). On the other hand, stringent regulations normally stimulate radical and disruptive innovations, such as the development of entirely new products and services by new entrants to the market, which often displaces the dominant incumbents. Historical growth in jobs and income has been attributed to technological innovations, although it is recognised that skilled workers are favoured by technological changes.

An important point to note with regard to stringent regulation is that enormous revenue could be obtained from pollution taxation, for example, which could lessen the need to tax payroll, or even make this superfluous (at some point in time). In such circumstances, the removal of tax from payroll would not only foster the creation of new jobs, but would allow more rewarding employment. There would also be more meaningful employment, given that technological innovations would foster skills development and retraining of the workforce, while healthier and safer work environments would prevail — important factors that influence the quality of jobs. Furthermore, the perverse distortion mentioned earlier would be neutralised – that is, adverse pollutions are taxed instead of desirable employment.

Finally, I caveat that the above mentioned proposal, though theoretically sound, may be impractical to implement in Jamaica in the near term and could even exacerbate our current situation if uncritically adopted. That being said, having a clear picture of what the ideal “endgame” looks like is important; at the very least, this allows us to assess if we are moving in the right direction.

From the analysis above, it is clear that the steps taken by the Government to reduce income tax and introduce new taxes on petrol, cigarette and air travel are sound economic moves. A final note to the EGC: Pay attention to the TFP and policies that encourage technological innovations, please.

Duane Rowe is a Jamaican energy economist who works in the Middle East. You may provide your comments to him at duane.a.rowe@gmail.com