KINGSTON Jamaica— Economist Dr Damien King has expressed his support for an increase in the income tax threshold, suggesting that a rise to $2.2 million would restore the purchasing power of income earners to 2016 levels when the threshold had been increased to $1.5 million.

Prime Minister Andrew Holness hinted at an increase in the income tax threshold last month during the Jamaica Labour Party’s campaign ahead of the local government election. He was speaking at a spot meeting in Clark’s Town, Trelawny when he mentioned the possible increase, referring to it as “1.5, 2.0”.

In May 2023, the Caribbean Policy Research Institute (CAPRI) had proposed that the government increase the income tax threshold to $2.2 million in the next budget. Dr King, who is the executive director of CAPRI, outlined two reasons an increase in the threshold is necessary.

“There are good reasons to want a higher threshold. One is that, because the threshold was set, not in percentage terms, but as a nominal $1.5 million, then inflation erodes the value of that over time and an analysis of last year’s budget argued that to avoid that arbitrary fall in the purchasing power value of the threshold then the government should consider raising the threshold again to restore it to the purchasing power equivalent of $1.5 million seven years ago, and that amount is $2.2 million,” he told Observer Online.

The second reason Dr King proposed in favour of the increase is taxation. He stated that the government, which needs taxes to ensure the proper running of the country and the affordability of social services, attains taxes from three sources: directly by taxing incomes, indirectly by taxing expenditure in the form of the general consumption tax (GCT) or also indirectly through duty imports when goods and services cross the border to come into the country.

“Amongst those, income tax is a particularly difficult tax to enforce because income is easily hidden. In fact, unless somebody is on the PAYE (Pay As You Earn) automatic taxation system, then the tax administration doesn’t have a good way of knowing what everybody’s income is. It is too informal or too secret,” he disclosed.

Dr King said, as a result, income earners who are automatically taxed from PAYE tend to be unfairly taxed compared to those who have informal jobs (for example entrepreneurs and people in the creative industry) who do not pay the full amount of their income tax, if any at all.

“So we have a necessarily iniquitous tax structure when it comes on to income tax. So therefore as long as we have such a high level of informality and it remains relatively easy to earn undeclared income, then that suggests that a government should try to rely less on income taxes and more on indirect taxes like GCT. And that’s another good reason to raise the threshold and replace it with GCT so to speak because GCT is harder to evade,” Dr King said.

Leader of the Opposition Mark Golding, while on his own campaign trail, countered the proposition of an increase, insisting that it would be financed by poor people who would not necessarily benefit from the income tax increase.

Dr King stated that while Golding is correct in that people with lower incomes would pay GCT and special consumption tax (SCT), his assertion that it would fall mainly on the poor is “somewhat of an exaggeration”.

“Mr Golding is correct in pointing out that people with much lower incomes are obligated to pay GCT and SCT but it is somewhat of an exaggeration because, nearly all items of consumption, wealthy people pay most of those taxes because they buy more of those goods because they are wealthy.

“So, as I keep pointing out, when you zero exempt bully beef because poor people buy a lot of bully beef they buy a lot less than I buy, they buy a lot less than Mark Golding buys, they buy a lot less than wealthy people buy because they are wealthier. So while it is an additional tax on poor people’s consumption, wealthy people pay far more of that tax when you take off the exemption,” Dr King explained.

He continued: “Point number two is that when you take off the exemption which is financed mostly by better-off people, then you have even more tax resources to put into targeted social programmes like PATH (Programme of Advancement Through Health and Education). So it is still a better tax regime to shift from the unfair income taxes, which is avoided by a lot of wealthy people, to GCT and then use that revenue from a more efficient tax to put it into targeted social programmes.”

When asked if the increase to the suggested $2.2 million would cause inflation to surge, Dr King responded in the negative. He explained that the income tax threshold increase would only cause a transfer of purchasing power from the government to income earners. However, since the government will choose to finance the increase through taxation, the purchasing power would go back to the government, the economist said.

“If the government raises the threshold, which means it is going to have less revenue, and people are going to have more disposable income, then the people can spend more, but the government has to spend less. It is a transfer of purchasing power from the government to the people,” he said.

“But since the government is going to choose to finance it by some other taxation, then whatever other taxes go up, those people’s purchasing power goes down. So my point is, in any scenario, it is a transfer of purchasing power from some people to those who are going to benefit from the threshold, it is not new purchasing power so it does not affect inflation,” he added.

When the prime minister mentioned the increase in the income tax threshold last month, he did not reveal when it would go into effect. He only stated that it would occur under his administration.

Finance Minister, Dr Nigel Clarke, is set to open the 2024/2025 Budget Debate on Tuesday, March 12. He will outline how the government plans to finance a $1.3 trillion budget.