Tax framework, garrisons retarding development

Paul Golding, GUEST COLUMNIST

It is well established that the diffusion of information and communication technology (ICT) can be used as leverage to increased national development, growth and better living conditions. However, for this to achieved, an important critical success factor is an enabling environment. For Jamaica, a major critical success factor, regardless of the growth strategy, is taxation reform. The recent publication by the World Bank and the International Finance Corporation, Doing Business 2011, ranks Jamaica 174th of 183 countries when it comes to the ease of paying taxes. Companies in Jamaica make an average of 72 filings per year, consuming 414 hours, or 51 days per year, and the total tax rate is 50.1 per cent of profit. The international average is 30 filings, 282 hours and 47.8 per cent of profit.

Where regulation is onerous, companies will opt for the informal sector, and this sector will grow at a higher rate than the formal sector. According to the World Bank, in developing countries, up to 80 per cent of economic activity takes place in the informal sector. This has major cost and development implications. The informal companies typically don't pay taxes, they have a slower growth rate, poorer access to credit, their staff receive no health or other benefits, and they generally remain outside the labour law.

Onerous regulations also lead to corruption, as persons will be more willing to pay under the counter to complete a process. It also breeds the perception that in order to get things done or to succeed, it depends on who you know and not what you can do. This also kills innovation.

Taxation is the primary source of government funding. Making it onerous for citizens to pay provides an incentive for tax avoidance, creates a disincentive for private-sector development, and shrinks the tax base. This results in overtaking, evidenced by Jamaica's ranking 111th of 138 countries in the global Information Technology Report 2011. In addition, keeping taxes at a reasonable rate encourages tax compliance. The tax reform must be ICT enabled and include eliminating, merging and reducing the frequency of filings and payments.

The process of obtaining a Tax Compliance Certificate requires that you visit three government agencies separately - National Insurance Scheme, National Housing Trust, and finally to the tax office - filing similar or identical information. This procedure indicates that there is no coordination among government agencies. Tax reform must include simplifying procedures, whereby duplication is eliminated and electronic services are offered in one-stop shop environment, which is accessible and will save business valuable time to travel to government agencies and waiting in line. An online option should be mandatory. The one-stop shop concept should also be extended to starting a business.

Should you ask 10 Jamaicans what kind of employment they would want most, eight will tell you they want to start a business. Small and medium-size enterprises (SMEs) are key drivers of competition, growth and job creation. For example, they account for an estimated 95 per cent of firms and 60-70 per cent of employment in Europe and 60-80 per cent of employment in Chile, China, South Africa and Thailand.

Lower barriers

The regulatory and policy environment must encourage growth in this sector and should not prevent companies from entering the formal sector without excessive bureaucracy. What is encouraging for Jamaica, based on global trends, is the number of days and the number of procedures to start a business. The global reports indicate that we are in the top 50 in both categories. This lowers the barriers to market entry and encourages entrepreneurship.

The universities currently focus on providing graduates who are employment-ready, and there has been a gradual move to create more entrepreneurial graduates with programmes being offered by both The University of Technology and the University of the West Indies. There needs to be greater emphasis on university-industry collaboration, with a focus on SMEs. The universities can provide ICT training, research and ICT services to SMEs.

A second critical success factor is the dismantling of garrison politics. What seems to have got lost in the entire Manatt-Dudus enquiry is the fact that there was a brazen attack on the State. Garrison politics is a political model to ensure that a politician remains in power. Politicians and sociologists will argue that this is a simplistic explanation of a very complex phenomenon. Nevertheless, the model is very effective, as both the prime minister and the opposition leader are members of parliament of garrisons. Despite the negative effects of garrisons on the wider population, politicians will not willingly disband them. Garrisons have evolved beyond what the politicians envisaged; they have become Vatican-like (no offence to Catholics), a self-governing sovereign city within a city.

If we are serious about the reduction in crime, any strategy that is formulated must include as a central policy, the dismantling of garrisons on both sides of the political divide. The prime minister and the opposition leader must lead in this regard. But can we expect that the politicians will change their business model? The politicians will have to be persuaded, unless we are comfortable as prisoner to this political system.

Persuasion must come from 'we the people' in the form of activism in the universities, the media, the Private Sector Organisation of Jamaica, and other civic bodies and the diaspora. Individuals and companies that make substantial contributions to re-election campaigns, and annual conferences must bring pressure to bear on the political establishment. Dismantling garrisons is not a panacea, but if they remain, that will retard development.

Dr Paul Golding is senior lecturer at School of Computing and Information Technology, UTech. Email feedback to columns@gleanerjm.com and pgolding@utech.edu.jm.