CONCERNS have been raised about the permanence of the funding source for the $25 billion in tax cuts announced by Finance Minister Dr Nigel Clarke on Tuesday. The concerns were raised due to Clarke indicating that the tax cuts will be financed out of $45 billion in receivables the Government is planning to sell on the capital markets.

“As the sale of receivables is presumably a one-off transaction, further funding will be required for subsequent years if the new revenue measures are to be maintained beyond 2024/25,” PricewaterhouseCoopers (PwC) said in a newsletter on Wednesday to its clients following Clarke’s presentation.

The identity of the receivables being sold to finance the tax cuts is not yet know, but it will help to pay for the $9 billion the Government said it will forego by increasing the personal income tax threshold to $1.7 million and the $11.4 billion it said it will give in amounts of $20,000 tax credits to more than 570,000 registered and compliant taxpayers who earn under $3 million per annum. Additional tax cuts were also announced for pensioners and renewable energy producers, while consumers will also benefit from a higher duty-free allowance, reduced general consumption tax (GCT) on imported raw food, and courier services will no longer pay GCT on the armour used on vehicles used to transport cash.

“It would make sense for quite a number of them to be continued, you wouldn’t expect them to be for one year, but the associated financing would have to be accounted for, for subsequent years since the financing for the current fiscal year is from a one-off transaction,” Brian Denning, Caricom tax leader and partner at PwC Jamaica told the Jamaica Observer as he expanded on notes written in his company’s newsletter. Yet he drew an optimistic tone that the tax cuts will be made permanent in the 2025/26 fiscal year.

“Tax revenues grow over time with inflation and economic growth,” he posited.

The Government has stayed away from increasing or introducing new taxes since it last implemented a $13.5-billion tax package to help pay for an increase in the personal income tax threshold to $1.5 million. So far, for the current fiscal year up to January, tax revenues are running 1.2 per cent above budget but is almost 13 per cent above the out-turn for the same period last year. The current projection is that tax revenues in the 2025/2026 fiscal year will be $70 billion higher in the preceding 2024/25 period.

It is that kind of revenue growth which Denning bets will help to ensure that the tax cuts are permanent.

“I wouldn’t expect, for example, that with the [personal income tax] threshold increased that, that would be increased only on a temporary basis. I would expect that, that would be maintained,” Denning told the Caribbean Business Report. As for the one-off $20,000 payment to people earning under $3 million, for now, that is not expected to be permanent, since it referred only to the year 2023, and, therefore, means that in the budget debates next year it won’t be there, so there will not be a need to find another $11.4 billion to fund it, unless a decision is made to continue it.

Still, beyond hoping that tax receipts will grow naturally from inflation and economic growth, Denning is pressing the button on getting more compliance out of taxpayers especially, given the billions of dollars in tax packages in the past, that have not been accompanied with higher tax collections as a percentage of gross domestic product (GDP).

Writing in 2017, Denning pointed out then that even with more than $150 billion in new taxes introduced in the prior dozen years or so, the tax to GDP ratio of about 25 per cent did not change.

“This suggests that non-compliance remains our single greatest obstacle to tackle if we are to break the cycle of requiring new revenue measures annually in order to plug the fiscal shortfall of the day,” he wrote then.

Reflecting and acknowledging the reality today, he however noted: “Things have definitely improved, and there is now a greater number of persons registered and paying taxes, but there is still a sense that there is a lot of persons who are out there who are not sufficiently in the tax net and certain industries that are escaping the tax net especially industries which do a lot of work for cash – the construction industry is a good example of that – and where there is a lot of self employed persons who are maybe flying under the radar and earning good money,” he pointed out.

Currently, only about 15 per cent of the 1.3 million people who are working are paying the personal income tax, and that has been the reason behind the shift to collect more taxes from indirect sources such as GCT, but even here, there are issues.

“The problem with indirect taxation is that it can put a greater burden on those with the lowest income, but on the other side, it can reach and touch a lot more people and generate more revenues than having to go and chase down people to report their individual income.”

The reverse tax credit proposed by the Government for people earning $3 million and under is one measure the Government said it will implement with a knock-on effect of improving compliance, due to the requirement for those who want to benefit to apply for the $20,000 payment online with the credit to be paid out by direct funds transfer. Still, there seems to be doubts that it will boost compliance by much, given the fact that most of these people would have already been in the system and are already paying their taxes.

“While we understand the desire of the Government to incentivise online filing and payment, we envisage that anyone who intends to file as a self-employed person (or who is included in an employer’s PAYE filing) are already largely accounted for. It is also not clear that a once-off $20,000 credit to someone who otherwise will not file and pay any tax will sufficiently incentivise them to register/file/pay. We also anticipate that the roll-out of such a large transfer scheme for a payment of $20,000 on a potentially once-off basis might be costly to administer vis-a-vis the relative benefits provided,” PwC said in its notes.