Leave poor people's food

Ian Boyne, Contributor

The Private Sector Working Group (PSWG), which comprises the Private Sector Organisation of Jamaica and other groups, has made some fine proposals for tax reform, but if it manages to convince the Government about the one to remove general consumption tax (GCT) exemptions from basic food items and supplies, there is likely to be disastrous repercussions for the poor and lower middle classes. This one must be resisted with all our might.

The PSWG is well-intentioned and is by no means malevolent towards the poor, nor merely expressing class bias. Its reasoning is not totally baseless: GCT exemptions intended to help the poor end up benefiting the upper and middle classes. As the PSWG document on tax reform unveiled last week informs: "Out of $100 of revenue that the Government of Jamaica gives up through exemptions, only $11 actually benefits the poorest 20 per cent of the population, but for the wealthiest 20 per cent of the population the benefits amount to $38."

At the current GCT rate of 17.5 per cent - the PSWG recommends it be cut to 12.5 per cent - exemptions cost Jamaica $22.6 billion. A more targeted mechanism to help the poor while excluding the rich would only cost the country $2 billion and would reach the poorest 40 per cent of the population. The PSWG points out, too, that these exemptions "present opportunities for tax evasion through misclassification and misreporting". So our present system of "protecting" the poor actually benefits millionaires who buy basic items to feed their dogs and cats and to put on big 'dos' for other rich friends. Let's have a more equitable, fair and efficient system, the PSWG is saying.

Of course, there has been the predictable and reflexive resistance from trade unionists and the People's National Party Youth Organisation. Usual suspects. I don't intend to critique the PSWG position from an ideological or knee-jerk position. I want to give a reasoned, data-driven response.

The first major challenge the PSWG faces with its proposal is how to design an efficient, transparent and workable alternative. The PSWG clearly has not given enough thought to this. The fact that one system is undesirable, suboptimal, iniquitous, etc. does not mean that anything chosen must be better. That's fallacious reasoning. The PSWG is right that our present universal exemptions do end up benefiting rich people who can afford to pay GCT on bread, corned beef, flour, salt and sanitary napkins. So they end up being subsidised by taxpayers' money.

Tax expert Allison Peart put it simply and forcefully last Thursday in a discussion on 'Nationwide at Five' in which I participated: "If I pay my helper $100 and she now has to go to the supermarket to buy her basic goods, which would now attract GCT, that is more money from her small sum. How and when she will get it back and who will sign her up on PATH (Programme for Advancement Through Health and Education) is all uncertain. All she knows is she now has less money than she had before to meet her needs and more hassle to get back the money spent."

Now with a Jamaican state known for its abysmal implementation deficit, inefficiency, and underperformance, what faith do you have in our designing a system to directly target the high percentage of our population at the poverty level? How long would that system take to be up and running efficiently, and what the hell will those who fall through the cracks do?

This is literally a life-and-death matter to poor people. Cash transfers, in the words of prominent development specialist Jayati Ghosh from Jawaharlal Nehru University in New Delhi, India, "have become the latest fad of the international development industry as the preferred strategy for poverty reduction". It has its advantages. For example, I like its concept of linking cash payments to attendance at health clinics and schools. It's an excellent strategy, and PATH is built on that model. But it is not a panacea when used as overarching policy to tackle poverty.

In the case of this PSWG proposal, the devil is really in the details. It is important that before we rush to please our masters, the International Monetary Fund (IMF), who are demanding tax reforms; and before we latch on to the latest development fad, we do some serious analysis before putting poor people's food on the line.

Middle class obliterated

We have to ask ourselves some hard questions while drawing on empirical data to guide our actions. We can't take a faith-based decision nor go on sentiment. We don't have an enviable track record of mass state-directed programmes. Even if we could tame our penchant for corruption and 'bandooloo' and restrain our tribalists who could use an expanded PATH for political spoils and scarce benefits, the sheer efficiency challenge of managing this system would be overwhelming.

Plus - and this is a crucial fact - it is not only those classified as poor and at minimum wage who really cannot afford basic foods. There are many middle-class people working in nice offices and looking quite 'stoosh' who can't afford basic foods, even without the GCT added. Many are barely surviving.

Our 'middle class' is almost wiped out, with practically only two classes left - rich and poor. We underestimate the number of lower middle class and generally defined middle class who cannot afford to eat properly and can't make ends meet. This includes journalists. I know what I am talking about. So while I understand the PSWG's good intention of taking away subsidies from the rich, I warn about the unintended consequences of doing this.

Crunching the numbers

Let's look at the data. Cash transfers began in Latin America about the mid-1990s. Two of the most renowned cases are the Bolsa Familia programme in Brazil and the Progresa/Opportunidades programme in Mexico. An important policy paper analysing the results of cash transfers in these two celebrated cases was published just last year by the International Development Economics Associates (IDEAS). It was titled Cash Transfers as a Strategy for Poverty Reduction: A Critical Assessment.

What are the facts? "Evidence shows that even the most 'successful' targeted programmes in Latin America fail to reach a large proportion of the poor. For instance, in Brazil's Bolsa Familia, 59 per cent of the poor were not reached. Similarly, Mexico's geographically targeted Progresa/Opportunidades Programme did not reach 70 per cent of the poor."

The paper goes on to say that cash-transfer programmes run the risk of being regressive, "i.e., transfer fewer resources to the poor than a universal scheme would have done". The paper quotes a World Bank study evaluating as many as 122 anti-poverty targeted interventions in 48 countries which shows that "one in four targeted programmes turn out to be regressive".

Another critical point to note, especially for us in Jamaica with such a high incidence of poverty, is the following statement: "Targeting is a more effective method of reaching benefits to the poor where they form a small percentage of the population. In countries where poverty is widespread and the poor face different kinds of discrimination, there is little justification for targeting as the problems associated with identifying beneficiaries and monitoring programmes tend to outweigh the benefits."

Let's not trifle with poor people's life! Well, it's not just traditionally poor people only, as many who would not qualify under the PSWG system are still objectively poor, though they have middle-class status. Our middle class also needs a reclassification à la A.J. Nicholson's suggestion vis-à-vis Jamaica's supposed middle-income status. A.J. is right, by the way. Our middle-income status in this global environment is a farce, just like many people's middle-class status here.

Administrative burden

And many of those in genuine need would be getting no part of that $2 billion which Mr Matalon and his group have designated for the "poor" and "most vulnerable".

There is also another important point which the policy paper makes: "For the identification of beneficiaries and reaching benefits to them, targeting often requires complex methods and advanced institutional capacity. These, in turn, translate into high administrative costs which consume a large chunk of allocated funds. Studies based on simulations of transfer programmes in low-income countries show that total administrative costs for targeted programmes can be as high as 30 per cent, compared to 15 per cent for universal programmes."

We can't adopt a non-empirical attitude of saying, "Don't confuse me with facts and studies. What we have is undesirable and we have to change it and try something else for what we have not working." No, that is not how we go about public policy. It must be research-driven.

Jayati Ghosh, in his essay in the May 21, 2011 issue of the Economic and Political Weekly of India ('Cash Transfers as the Silver Bullet for Poverty Reduction: A Sceptical Note'), says: "Targeting of any particular scheme involves various costs and difficulties." He identifies the administrative costs and the prevalence of "exclusion/inclusion errors" as other troubling factors. Put simply, we can't afford even one exclusion error, and I don't see us beating the common experience of targeted programmes in other societies.

Directed, targeted cash transfers have their place (like PATH), but we should not overreach with them. Leave poor people's food alone! It's better the rich get some of their food rather than have some lose it all.

Some positives

But there are number of the PSWG proposals which I support wholeheartedly, including the one to raise GCT on the hotel sector. Now this sector has much clout, but the facts are solidly on the PSWG's side, and the Government must resist hotel moguls and their mouthpieces. The World Bank's major country report on Jamaica last year shows a leakage rate of 80 per cent for this sector, "one of the highest in the world". An Inter-American Development Bank report says tourism incentives are too expensive and consumes scarce public resources.

I also agree with the PSWG on increasing GCT on electricity, not reducing it, as a disincentive to wasting energy, especially at this time. I agree with lowering income tax to 15 per cent for those earning up to $1.1 million and for an increase in property taxes (with exemptions, I would add, for pensioners and genuinely distressed persons). But I strongly disagree with giving up $5.5 billion to cut taxes for businesses (15 per cent instead of 33.3 per cent) with the "faith" this will spur investment.

Ian Boyne, a veteran journalist, is the winner of the 2010-2011 Morris Cargill Award for Opinion Journalism. Email feedback to columns@gleanerjm.com and ianboyne1@yahoo.com.