The first thing to understand is that the $22 billion dollar tax package has to be looked at in the context of a likely overall fiscal deficit of at least $110 billion (it could easily be higher), or 10 per cent of gross domestic product, using a figure for gross domestic product of around $1.1 trillion.

It needs to be said once again that the key reason for our current fiscal crisis is the massive rise in interest costs, from $125 billion in 2008/2009 to $175 billion in the revised estimate for the current 2009/2010 budget. It must also be noted that our current fiscal crisis is mainly due to the continuing impact of the debt accumulated from our own home grown financial crisis in the 1990’s, aggravated by the use of excessively high interest rates to defend the exchange rate, and is nothing new.

The imposition of the gas tax in 1999, or the customs user fee of 2003, like the tax packages of 2009, are ultimately driven largely by the toxic mix of the debt overhang created during the financial crisis, and the use of interest rate policy as a blunt instrument to bludgeon the real economy into reducing its demand for foreign exchange, whilst bribing the financial economy, including critically overseas private investors, to finance our continued debt accumulation.

It is useful to compare Jamaica’s interest rates with those of Uruguay, a highly indebted small country with a similar population to Jamaica, which had its own more recent extremely severe banking crisis in 2002 as a consequence of their neighbour Argentina’s financial collapse. Yesterday, their Monetary Policy Committee announced the lowering of their monetary policy rate (the overnight lending rate) by 1.75 per cent to 6.25 per cent. This is the third time (out of their four quarterly meetings per annum) that they have cut interest rates this year, and was the deepest cut since September 2007, when the central bank started using interest rates as its main instrument of monetary policy. At least two of our key private sector organisations, namely the PSOJ and JCC, have advocated the creation of such a committee since the financial crisis of 2003, a call which up to this point has gone unrewarded.

One of the consequences of our ongoing fiscal crisis is that, as in 2005 when GCT was increased by 1.5 per cent, tax policy measures are imposed without the reforms that would allow the generation of a compliance dividend.

As the Jamaica Chamber of Commerce (JCC) puts it bluntly in their December 20 press release “It appears that the need to raise revenue has once again triumphed over any planned prospect of tax reform.”

The key problem with the proposed tax measures is that they are all policy measures to increase taxes, and are neither sufficiently equitable nor targeted toward the non compliant, with the significant exception of the tax on gas.

“Whilst we understand that an increase in taxes may be necessary to close the budget gap, combining an increase in the rate of GCT with a major reduction in the number of GCT exempt items appears excessive, and possibly counter productive, when GCT and other consumption taxes are already underperforming due to our weak economy. “

The JCC makes the critical point that tax policy should be looked at as trying to achieve the best trade off between efficiency and equity.

“We would suggest that if the intention is to substantially widen the base of items subject to GCT, as proposed in the package, then one should reduce the rate of GCT to a more palatable 15 per cent. The higher the rate of GCT, the greater the pressure on our poor, the greater the incentive for avoidance, and the greater the suppression of the consumption necessary for the survival of businesses of all sizes.”

During the budget process leading up to April, an expert committee was set up under the national planning summit (NPS) process to amongst other things deal with tax reform. This was supposed to be merged into the full fledged social partnership (including the unions and the opposition) now termed the partnership for transformation. Like the JCC in their recent release, the committee recommended that if the intention was to broaden the base (for which there are good efficiency arguments), then there would be a need to lower the rate on equity grounds. It was estimated that a lower rate, say 15 per cent, coupled with a broader base would substantially improve compliance. Instead, in the April budget, an attempt was made to reduce the sensitive exempt items, and maintain the current rate of GCT, which unsurprisingly is the portion of the April tax package that was unable to be implemented.

The committee also looked at the introduction of what is effectively an Advance General Consumption Tax of 5 per cent to be imposed at the port. Compliant taxpayers would be able to claim it back almost immediately, whilst the playing field would be tilted against those importers who never pay GCT or income tax, and who would therefore not be able to claim it back.

In Page 114 of “A Blueprint for Taxation Reform in Jamaica” it was “suggested that the Customs User Fee (CUF) be abolished and replaced with an advance tax credit (ATC) which is charged at the rate of five per cent of the customs value of the good imported. The ATC amount would be immediately credited upon payment to a Tax Credit Account maintained in the name of the importing taxpayer. This Tax credit Account could then be drawn upon by the taxpayer to settle his net GCT or income tax liabilities. To the extent that the claiming of the credit results in a net refundable position, this would be refundable in the normal manner by the revenue.”

In our current state of economic emergency, this would be a good alternative to raising the rate of GCT by 1 per cent proposed in the current tax package, which is likely to increase evasion and drive people underground. It could be coupled with a roll back of the most “sensitive” GCT exemption removals. The Prime Minster could commit to removing the customs user fee at the end of our “special” period, as was proposed in the “Blueprint.”

The JCC also notes that “The proposed tax on electricity appears to be set at too low a level of consumption, and will be a particular hardship to the middle class.”

It is not that this is necessarily a bad revenue raising measure in isolation, but it is a bridge too far in the current weak economic environment, particularly when combined with all the other tax measures.

A better alternative would be to make commercial businesses pay GCT on electricity instead. Those businesses in the “gray” economy will not be able to claim back the GCT if they are not already in the tax net, which is essentially the same argument as the advance GCT at the port. To avoid businesses suddenly becoming residential homes, this could be combined with a GCT on relatively high consumption “residential” homes of say 600 kWh monthly, which would also target the upper class, thereby increasing equity.

Finally, property taxes need to be doubled, perhaps with a higher threshold. This could be combined with the imposition of a lien on property on which taxes are not paid. It is ridiculous that we cannot collect property tax (unlike people property can’t move), and the rate is much too low. The administrative process could be changed so that the valuation notice is accompanied by the tax demand and the latter is aggressively pursued.

Consideration should also be given to using “improved” value rather than “unimproved” as a basis for valuation, as part of a plan to finance local government properly (simultaneously eliminating almost all of the constituency development funds) as occurs in most other countries. This suggestion should also be used to defuse the equity argument of increasing the income tax rate on salaries of over $4 to $5 million, which is a ridiculous policy measure in an environment where so many of the self-employed are already evading taxes (it would simply increase evasion as would a higher rate of GCT), and would therefore increase the burden on existing PAYE taxpayers.

The withholding tax on interest proposal (to increase it from 25 per cent to 33.33 per cent) that has been floated for some time is unlikely to achieve its intended revenue raising goal, whether the number is $5 billion, $8 billion or even $10 billion.

This is because domestic corporate holders of debt are already taxable at 33.33 per cent, endowments and pension funds are exempt from taxation, a withholding tax is in any case creditable or refundable, and for foreign holders of taxable Government of Jamaica instruments, their income tax liability is almost always capped by treaty protection.

For such a measure to be effective, the brunt would have to be borne by individual investors. However, most of the money of Jamaican individuals is extremely short term, around 30 days, and as the financial crisis has worsened, individuals have grown more, not less concerned about their investments in Jamaica. The main reason why we have not yet had significant capital flight is the absence of spare cash in the economy to convert into U.S. dollars, the soundness of the banking system (in a world of banking crises), the near zero rates on offer abroad, and (until last Thursday at least), a confidence in our Prime Minister to get us through some very difficult times with the aid of the IMF.

It therefore remains extremely difficult to understand why, on an opportunity cost basis, if investors are now willing to accept lower after tax returns (as implied by the withholding tax idea), it is not better to drive interest rates down faster, saving $3 or $4 for every $1 captured in tax. This would also be an enormous stimulus package to every private sector borrower of money, which would not happen if interest rates stayed the same because the tax rate rose, and would thereby drive additional tax revenues.

The government’s failure to announce the tax and refinancing plan simultaneously has given the population the exceedingly false impression (aided by our destructive political environment) that nothing would be required from the owners of capital. In fact, the goal should be to go well beyond the original liability management programme (which just pushed interest costs into the future) to save at least $40 billion in interest costs this coming fiscal year (through a combination of lower rates and refinancing) peaking perhaps at close to $50 billion, thereby completely reversing the devastating increase in interest costs this year.

In this context, and only in this context, it is not a good idea to pursue either a withholding tax on interest rates, or a tax on bank profits, if that will destroy the much larger savings that could be between two and two and half times the size of the tax package. This is what true burden sharing must mean at this time, and should be part of a negotiated process (including the tax package) under the partnership for transformation process (which already includes the opposition) rather than endangering the vital IMF agreement through street action.