Politicos must bravely go where all experts have recommended before
The objectives of tax reform in Jamaica should be:
1. Economic growth: to promote a rise in the standard of living for all.
2. Revenue: to raise additional revenue towards balancing the fiscal budget.
3. Efficiency: to be able to collect taxes due without spending too large a share of that revenue to ensure compliance.
4. Equity: to spread the burden of taxation such that those persons of equal means pay an equal share and those of unequal means pay appropriately unequal shares.
In order to make progress towards those four objectives, Jamaica's tax code needs to be reformed drastically.
This has been the conclusion of the reports of the Matalon Committee on Tax Reform (2005), Tax Reform and Economic Development by Roy Bahl and Sally Wallace (2007), and the Blueprint for Tax Reform (2009).
A review of the findings and recommendations of these studies suggest that, in order to meet the objectives outlined above, the following three priority areas are the most critical elements required for a tax-reform programme for Jamaica.
First, simplify the tax structure and facilitate compliance. This priority could be met by, amongst other initiatives:
reducing the number of tax rates for similar activities and reducing the number of exceptions to those rates;
rewarding historically compliant taxpayers with extended validity of their tax compliance certificates (TCCs); and
implementing a unified tax return for all types of taxes; and by permitting the filing of a consolidated GCT return by a group of companies.
The second priority area is to shift from direct taxes on income to indirect taxes on consumption and production.
Income taxes are the most iniquitous type of taxation because they are the easiest to evade and, therefore, the most costly to enforce.
CaPRI's brief, Tax Reform for Growth - of which this is article is a summary - recommended that income tax reduction be effected by lowering the rate of corporate income tax and by raising the threshold of the personal income tax while holding that rate unchanged, so that more persons at the lower-income brackets would pay no income tax at all.
The lost revenue could be replaced by extending the coverage of the GCT to items that currently do not attract GCT.
These measures will collectively shift the burden of taxation from income to indirect taxation.
Since the practice of exempting certain entities facilitates evasion beyond the legal privilege accorded by the exempt status, GCT exemptions should be revoked and the revenue earned earmarked for transfers to the same formerly exempt entities, so that they are no worse off. This would include the Government.
Higher levels of social protection would be a necessary condition for shifting from reliance on direct to indirect taxes.
But the current structure, under which the benefits of tax exemptions are poorly targeted and exploited, is ineffective as a means of poverty mitigation, as well as wasteful of public resources.
Social protection ought to be pursued through the spending side of the budget via the PATH programme, public health, public education, and so on.
This would allow social protection to be targeted to those who actually need it and, through the additional revenue collected, make it possible for a larger proportion of needy citizens to receive higher levels of social protection than currently obtains.
The third priority area for achieving progress towards the goals of an effective tax code is the area of tax concessions, the proliferation of which needs to be tamed and the amount drastically reduced.
The myriad of tax concessions, including both discretionary tax waivers and legislated tax incentives, forego revenue, distort investment, undermine the integrity of the tax system, and have proven to be manifestly ineffective at promoting economic growth. In some cases, tax concessions are being used to meet social objectives rather than economic ones. However, where social objectives need to be met, this should be done by means other than discretion, so as to maximise transparency and minimise opportunities for corruption.
The collection of incentive legislation should be reviewed and rationalised and the power of the responsible minister to waive tax obligations should be eliminated.
Further, any new tax concessions should be tabled each year as part of a tax expenditure budget the same way that explicit expenditures are currently tabled, so that they may be scrutinised and debated.
GCT exceptions and tax incentives account for the equivalent of approximately 10 per cent of GDP in lost revenue, which implies that the budget deficit could be eliminated with the elimination of half of the current concessions without any expenditure reduction or raising of tax rates.
How well does the Green Paper on Tax Reform satisfy the objectives and priorities for tax reform in Jamaica?
The Green Paper is broadly consistent with the priorities for tax reform articulated above, especially with respect to the first two priorities, namely: simplifying the tax system and decreasing the reliance on direct taxes.
Notwithstanding that broad consistency, some straightforward steps to achieving the first priority have been overlooked, such as, extending the validity period of the TCC for historically compliant taxpayers and allowing consolidated filing for company groups.
In terms of decreasing the present reliance on direct taxes, the Green Paper does suggest a reduction in corporate income tax rates and a raising of the personal income tax threshold.
However, the proposal in the Green Paper to also reduce the rate of GCT implies that a further reduction in reliance on income taxes could be effected by foregoing the rate reduction.
This would result in a stronger shift from the easily evaded income tax to the harder-to-evade GCT.
A weakness of the reform programme outlined in the Green Paper is a failure to articulate a more measurable commitment to the reduction of tax waivers and tax incentives.
The proposals stop short of accepting the Inter-American Development Bank proposal to eliminate discretionary waivers and, instead, states an intention to "significantly reduce" them.
Mere reduction is insufficient, since it is the fact of discretion that undermines the integrity of the system of taxation, and also serves as a channel for an ever-expanding demand for waivers.
The elimination of discretionary, but not statutory, waivers alone would raise revenue by two per cent of GDP, which would be sufficient revenue to afford both a reduction of the corporate income tax rate from 33.33 per cent to 25 per cent and a doubling of the personal income tax threshold.
Tax reform in Jamaica is urgent and consequential. To achieve simplification and compliance, more can be done than has been outlined in the Green Paper.
To make headway with tax concessions, the Government needs to be more ambitious and more committed.
The Green Paper is, nonetheless, a bold step towards reform in both its substance and as an exercise in better governance.
Dr Damien King is Executive Director and Anika Kiddoe is Research Officer of the Caribbean Policy Research Institute.