Editorial | Let the tax policy debate begin

The People’s National Party’s (PNP) reprising of its proposal for a two-percentage point reduction in the general consumption tax (GCT) suggests that the issue will be central in its election campaign, which is why the party owes the public further and better particulars on the idea, including whether it would impact the fiscal accounts and the prospects for job creation and growth.

In other words, with a general election not due for more than a year, the PNP has provided an opening for a serious debate on taxation policy with the immediate noise of a campaign. Hopefully, Nigel Clarke, the finance minister, will engage the challenge, using it as an opportunity to declare on how the Government plans to expand on its stated policy of indirect taxation.

The PNP, through its shadow finance minister, first raised the matter of lowering the GCT rate during the Budget Debate in March and part of a package of measures to give back J$16 billion to taxpayers, in addition to the J$14 billion proposed by Clarke, which the Opposition claimed targeted primarily the well-to-do and the rich.

They, however, didn’t provide a full breakdown of which sectors would forgo the taxes, or specifically how much the rate on GCT, or the other big target, an additional J$7 per litre tax on petrol imposed in 2017, would be reduced.

But speaking at a meeting of his party’s National Executive Council (NEC) on Sunday, the PNP’s president, Peter Phillips, said the GCT rate could be lowered to “fourteen-and-half per cent as a first step in realigning the general consumption tax and expanding the give-back which the party called for during the Budget Debate”.

Dr Phillips framed his suggestion as a way to help people hit by the recent six per cent depreciation of the Jamaican dollar against its US counterpart, which has pushed up prices. His comments also came against the backdrop of a 2012 policy proposal, published in a government White Paper when he was finance minister, to, over time, lower the GCT rate to 10 per cent. In the 2012/13 fiscal year, GCT was lowered one percentage point, to the current 16.5 per cent.

The tax policy debate, however, made a major turn in the run-up to the 2016 general election, when the Jamaica Labour Party (JLP) pledged to raise by more than 150 per cent, to J$1.5 million, the threshold at which Jamaicans paid income tax. That give-back, the then opposition party said, would be paid for out of an existing government tax on petrol, as well as by ending a hedge against a rise in oil prices and applying the premiums to the scheme. No new taxes would be raised.

When the JLP won the election, they discovered that they severely miscalculated the cost of the policy, including the anomalies it would create. In the end, the Government, aware that the idea, as initially articulated, would undermine Jamaica’s agreement with the International Monetary Fund (IMF), pivoted the proposal to indirect taxation and implemented the increases in two tranches. It covered the cost by raising J$30 billion in new taxes over those two fiscal years. The Government, though, estimated that more than 300,000 people were removed from the income tax roll.

That was part of the background against which Dr Clarke, among other things, in March, reduced taxes on instruments granting security on loans, increased the threshold at which death taxes are applicable, and reduced the tax on the transfer of property.

REGRESSIVE TAX POLICY

While the measures were largely hailed as a stimulus package, the Opposition insisted that, largely, they represented a regressive tax policy. The PNP’s more specific proposal for lowering the GCT rate, beyond Mr Mark Golding’s statement in March, makes it ripe for scrutiny, especially with regard to its likely impact on fiscal stability and economic activity.

For the current fiscal year, the Government has projected to earn approximately J$200 billion, on which a two-percentage point, or a roughly 12 per cent, lowering of the standard rate, would translate to a J$24 billion give back to consumers. The increased consumption facilitated by this flow-back would be expected to stimulate economic activity, including driving imports, which are expected to account for 47 per cent of the tax.

Further, any fiscal hole left by forgoing revenue from GCT has to be closed, which will possibly be countered by arguments about the possibility for adjustments elsewhere, and that the Government has, in recent fiscal years, run a significantly higher fiscal balance than the six per cent of gross domestic product (GDP) to which it is committed under its agreement with the IMF.

In 2018-19, for instance, the J$163.6 billion primary balance was nearly $8 billion higher than it needed to be. The trend continues in the current fiscal year. Moreover, the primary surplus, which is to end the year at six per cent of GDP, was running at 7.5 per cent of projected levels.