It’s no secret that Jamaica has been undergoing extensive tax changes since its new government was elected in February, with more slated to come during their term. The Government has committed to their political promise of raising the income tax threshold in stages, however, and intends to shift the weight of government revenues earned from income taxes to consumption taxes.

Taxation of any kind is not generally welcomed in any society and stereotypically causes people to believe they will be “poorer”. This does not need to be the case. Although taxes will remain, the shift from income tax to consumption tax can positively affect a person’s ability to increase their wealth if they allow it to, simply by investing.

CONSUMPTION TAX VS INCOME TAX

Consumption tax is based solely on what a person consumes. This consumption can be either a good or a service. Income tax, on the other hand, is an annual tax levied on one’s personal income earned, causing there to be an imbalance between what an individual works for and what they actually receive.

ADVANTAGES OF CONSUMPTION TAX

A shift towards consumption tax has many benefits. It is harder for a government to increase consumption taxes excessively as it will cause persons to be more selective in what they purchase. Selective purchase refers to only buying the necessities which will decrease the Government’s potential revenues and ability to meet their debt obligations.

On an individual note, consumption taxes give persons more freedom on how their income earned is actually used and essentially how much they can save. A person’s increased ability to save will in turn increase their ability to invest.

Many economists believe that consumption taxes are better as they do not change spending habits significantly and thus, they describe it as neutral. It also is believed to encourage more productive work behaviour as people are actually able to “see” the value of the work they put in reflected on their pay cheque.

Income tax tends to take away that pleasure, as the more you earn is typically the more your income is taxed. Consumption taxes have helped the economies in many European countries. The Value Added Tax (VAT) is the type of consumption tax they use and has worked beneficially in their economy, allowing them to raise more revenue while having no long-term damage to their economy in relation to this approach.

HOW DOES THIS HELP INVESTING?

As of July 01, people will begin to see extra money from their pay, although it may not seem like a lot of money “every mikkle mek a mukkle”. The shift from income tax to consumption taxes will be beneficial to individuals because now you will have more control over the money you are able to save.

The money saved, if invested, has the potential to grow significantly more than if it is sitting in a savings account at a bank.

What some people fail to realise is that it doesn’t require large capital to start investing. You can start investing with as little as $5,000.00. Which essentially means, the extra money that you will start to see reflected on your pay cheque can go directly towards your investment account every month, helping to secure your financial freedom.

Therefore, investors will ultimately have a higher rate of return on their funds.

Also, by investing in dividend-paying stocks, this will again allow you to increase the return on your investment through not only the stocks growing in monetary value but by the companies essentially paying you part of their profits for investing with them.

Come July 1, 2016, the first phase of the income tax threshold reduction will take place, allowing most people to take home thousands more dollars a month. The freeing up of this additional income will help put people in a better position to start investing or even just giving them the ability to invest more funds – which will allow them to gain much higher returns on their money than in a bank, and increase their overall wealth.

In the long run a shift towards consumption taxes and away from income taxes will also allow people to take greater advantage of the investment opportunities available to them. By choosing to invest this extra income they will begin to see their money “working” for them, see their wealth grow and come closer to achieving their financial dreams.

Justine Cork is a processing associate at Stocks and Securities Ltd.