The question of a reduction in the General Consumption Tax (GCT) rates, currently at 16.5 per cent, is a hot topic being debated  in public forums across the country in recent days. The debate started with the Leader of the Opposition Dr Peter Phillips recommending that GCT rates should be reduced by two per cent as this would be of some relief to the poor in the society. Notably, this recommendation was supported for consideration by former finance minister and current Minister of Industry, Commerce, Agriculture and Fisheries Audley Shaw.

It is my understanding that a two per cent reduction in GCT would result in a  $26 billion to $30 billion fall in Government revenues.

Recently, Senator Dr Andre Haughton added to the debate by advocating that the two per cent reduction recommended would result in a $2 saving for every $100 spent by the consumer. This, he argued, would be of little consequence to the average consumer. Conversely, a $26 billion fall-off in government revenues could have serious consequences in terms of government programmes and polices.

Dr Damien King, from the Caribbean Policy Research Institute (CAPRI), in an interview on national television stated that if it was the Government’s objective to assist the poor by reducing GCT by some $26 billion, then the objective would be better served if the funds were to support programmes aimed exclusively for the poor, such as those enrolled on the Programme of Advancement Through Health and Education (PATH). He argued that a GCT reduction would benefit the rich more than the poor, as they had the capacity to spend more and, in fact, consumed more.

Both of these learned gentlemen have made valid points. However there is another issue that must be included in the debate.

It has been widely accepted that Jamaica has an informal sector which is in excess of 40 per cent of the overall economy. These people operate under the radar and have little to do with the formal, law-abiding economy. They do not pay income taxes or corporation taxes and, in fact, pay little if any direct taxes. Members of the informal sector only contribute to government revenue when caught in the indirect tax net such as GCT.

Reducing GCT will reduce the overall contribution made by this informal sector — over 40 per cent of the overall economy — and by so doing increase, proportionally, the stress on the already overburdened people who have declared themselves in the formal economy.

Income tax is a very inefficient and expensive tax to collect, as it only applies to a very small proportion of people — less than 10 per cent of our working population. These people who contribute under the PAYE (income tax) system are penalised and shafted because they abide by the laws of the country. In addition, people on the PAYE system who earn in excess of $6 million are further penalised and have to pay an additional five per cent surcharge on top of the current income tax rate of 25 per cent. This surcharge applies to less than 12,000 individuals who declare that income. As a result, the funds collected from this surcharge is negligible, very expensive to collect, and only serves to stifle initiative and enterprise.

It must be remembered that people paying income tax on their earnings also have to pay GCT  on their purchases — a double whammy.

Warren McDonald is a past president of the Jamaica Chamber of Commerce. Send comments to the Jamaica Observer or warmcd@gmail.com.