Editorial | More grist for the tax debate mill

Peter Phillips, the Opposition leader, and Nigel Clarke, minister of finance, can perhaps claim credit for the latter’s signature policy action in this year’s budget, a 1.5 percentage reduction in the rate at which the general consumption tax (GCT) is charged on goods and services in Jamaica.

Though the cut was half a percentage point shy of his proposal last November, Dr Phillips, ridiculed by some analysts for the suggestion, will feel vindicated by the Government’s embrace of the idea, which we expected to have been a central plank of his party’s campaign for the next general election. At the same time, not only may Dr Clarke have undercut the People’s National Party (PNP) on a key policy matter, he will be credited for a political maturity that allowed his embrace of good ideas, without being constrained by partisan considerations.

On the broader economic front, however, the GCT cut, as we noted when Dr Phillips revived the matter, opens the opportunity for a fuller debate on taxation policy, including the 2012 proposal by the Private Sector Working Group (PSWG), for a much deeper cut, to 12.5 per cent, in the GCT rate. First, however, it would be useful for Dr Clarke to clarify the base he used to calculate that his measure would result in an approximate J$14 billion giveback to consumers.

Until the minister’s reduction kicks in next month, GCT, an input-output tax, is charged at a rate of 16.5 per cent. So, the 1.5 percentage point downward adjustment translates to a reduction of roughly nine per cent.

At the start of the current fiscal year, which ends on March 31, the Government projected to collect around J$200 billion in GCT, excluding a special consumption tax that is applied to some imports. On that basis, when Dr Phillips called for the two-point, or 12 per cent, cut in the rate to consumers, this newspaper estimated that it would have required the administration forgoing J$24 billion in revenue. That, some critics, including some in Dr Phillips’ own party, say would be foolhardy of any government, in the face of Jamaica’s, though improved, still fragile fiscal circumstances.

MOVING TOWARDS INDIRECT TAXATION

Up to January, 10 months into the fiscal year, government data, the most current available, show GCT collection at approximately J$170 billion, running marginally ahead of projections. According to the estimates for 2020-21, GCT should bring in J$213.6 billion. In the absence of specific details, the data suggest that the administration may have located its base period for calculating the revenue loss somewhere between the inflows up to January, and revenues collected over the first nine months – to December – when the consumption tax earned J$145.6 billion. A cut-off in either of those two months would place the revenue loss between J$13.1 and J$15.2 billion.

Probably more important than this seeming J$1 billion discrepancy on either side of the ledger, is Dr Clarkes’s assertion that the GCT cut will leave more money in the hands of consumers “which will boost economic activity, which would benefit all households and firms”. This is important in the context of the Government’s declared policy of moving towards indirect taxation, and the continued weak growth in the economy despite stability at the macro level. Poor people, especially, will likely consume the giveback, rather than save it, providing Dr Clarke’s expected quick driver to the economy.

This, on the face of it, puts on the agenda the PSWG’s proposal of eight years ago to lower the GCT, then at 17.5 per cent, to 12.5 per cent, a 24.2 per cent fall from the current rate. Based on the GCT projections for 2020-21, this would be tantamount to forgoing more than J$52 billion in revenue. The PSWG, however, had proposed widening the GCT net, by removing its exemption from a slew of items, but compensate with cash transfers to the poorest people via social safety net schemes, such as PATH. That, the group argued, would be cheaper than allowing the wealthiest groups to continue to benefit from GCT exemptions.

Another point for consideration in any debate is the effect of the administration having, over two fiscal years, doubled the income tax threshold to J$1.5 million, and recouping the J$30 billion it gave up with a range of indirect taxes. That move was extremely popular. Some analysts, however, argue that its main beneficiaries were a relatively small subset of taxpayers, as most consumers were already below the threshold for paying income tax. The current GCT giveback, which is again directed at consumers, is around half of what the Government recouped in the indirect taxes that covered for income relief.

With an election in the offing, these, and other, taxation questions are worthy of serious debate.