Widening GCT coverage would hurt the poor

The tax committee of Parliament which is considering reforms has before it a number of proposals, the most significant of which would be the widening of the coverage of the general consumption tax (GCT). On the face of it, the option of lowering the rate of the GCT would appear to be beneficial to all income groups, especially those at the lower end of the economic ladder who consume a high percentage of their income.

But such a measure could be exactly that, superficial, for by applying the GCT to additional items mostly consumed by the lower-income groups, it could turn out that their tax burden would actually increase.

As the committee proceeds with its task, it should pay close attention to the debate now raging in America about the widening income inequality in that society and how its tax system has discriminated against those at the bottom of the income scale.

Ironically, it was billionaire Warren Buffett, one of the world's richest men, who struck the most resounding blow against the distortion in the US tax code in his recent opinion piece. Therein, he revealed that he paid a rate of income tax half that of his secretary by virtue of the generous deductions allowed people in his economic category.

Even as the committee must give priority to proposals that would simplify the system and have the effect of stimulating economic growth, the highest of all priorities, it should be careful to ensure that new measures meet the essential criterion of tax fairness. A measure that would place greater reliance on GCT as the primary means of tax collection will be regressive - meaning that it would increase the burden of taxation on to the lower-income groups.

Explaining low productivity

Jamaica already has a high level of income inequality, and in my view, the highly unequal sharing of the surpluses at workplaces is a significant factor explaining Jamaica's low productivity levels.

It is now being recognised in the United States that the slow rate of recovery from the recession is in large measure linked to the weak demand by consumers, particularly by its middle class, which has suffered stagnant wages going back over the last 30 years or so. In the same period, the top one per cent of Americans have enjoyed exponential growth in their incomes, and reportedly now take in more than 24 per cent of the national income. As the lower and middle classes have fallen behind economically, it seems that the super incomes of the rich have given them extraordinary political power.

A recent survey by a Princeton University political scientist, Martin Gilens, has unearthed evidence that suggests that this power is such that it overrides policy changes with which the group disagrees, even if the changes enjoy majority public support. By and large, those policy changes that enjoy majority support, which includes voters in the highest income categories, have a better chance of legislative passage. In other words, the opinions and the interests of the rich count for far more than those of the poor.

Corruption

Jamaican politicians who operate without even the rudiments of regulations of its campaign finance system, as well as no public funding for campaigns, are particularly vulnerable to undue influence by special interests. We have seen how this has played out in the corruption that surrounds the award of some government contracts and the sale of public property. One can surmise that, over the years, it has been a factor in tax waivers and the relative lack of firmness in dealing with tax evasion by 'big' people.

We run the risk, therefore, that in our political setting, those with the heaviest economic clout will carry the greatest sway over the measures that are finally introduced. The fact that the political parties will shortly be knocking on our doors is an opportunity for the working people to demand that their interests are not short-changed. Active participation in the proceedings of the tax committee would be one way for citizen groups to influence the measures that will be adopted.

I agree with the position that in considering the tax-reform proposals, special weight should be given to measures that would lift the economy on to a growth path. In America, it is the lack of economic growth that is now the major cause of political stress, as reflected in the Tea Party and 'Occupy Wall Street' protests. As in America, this lack of growth is a root cause of the social decay and debilitating crime that are crippling Jamaica.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.