New tax proposals fair and balanced

Joseph M. Matalon, Guest Columnist

The main design concepts of the Private Sector Working Group (PSWG) on Tax Reform proposals, carefully analysed and modelled over nine months, indicate what we believe to be the formula for sustainable growth, while protecting the vulnerable in our society.

We firmly hold that the poor must be protected while lowering taxation rates for the broad cross section of society; broadening the tax base; equitably sharing the burden and simplifying the tax system.

However, in order to achieve this formula, we must simultaneously remove the inefficient costs to our society, which are inherent in selective exemptions, waivers and incentives that were introduced as a result of political and special-interest lobbying, while activating social-mitigation strategies to protect the vulnerable. This would enable the country to bring down consumption tax across the board, institute lower personal and corporate tax rates to levels that would spur investment and economic growth and development, and raise compliance levels.

Protection of the Vulnerable is Critical

The debate so far has correctly been centred on the most important and sensitive element of the proposal, i.e., the protection of the poor and vulnerable. We all agree that the poor are facing grave hardships, and some have argued in favour of keeping the universal system of benefits over the direct cash-transfer system which we propose.

However, there are instances where the universal system of GCT exemptions does not reach the very poor who do not even have the money to buy basic foods, much less pay the tax on these. These are the people who have to buy in small quantities, whether it be a quarter loaf of bread, or a quarter pound of flour, rice or cornmeal, for prices far exceeding what you would pay for a full loaf or a pound of rice, cornmeal or flour at the supermarket. These hidden costs far exceed any tax, and to the very poor a cash transfer would clearly be better.

It is acknowledged the world over that the 'family grants' (Bolsa Familia) programme in Brazil has been responsible for the reduction of poverty from 22 million people to seven million in three years. This is an example of the social-mitigation strategy of seeking to give to the poor by direct cash transfers, in order to compensate for the tax on basic foods. It was also part of a series of reforms, the centrepiece of President Lula Da Silva's social policy, which resulted in exponential economic growth in Brazil.

The PSWG is convinced that a similar mechanism providing such grants can contribute to the alleviation of poverty and be a platform for significant economic growth and development in Jamaica, making use of the existing Programme for Advancement Through Health and Education (PATH) and expanding it appropriately.

In concept, PATH performs an important social intervention, with current programmes conditioned on education and health. PATH has scientifically developed a database of households comprising those who would require a benefit, even though not everyone now receives a benefit because of the conditionalities.

Cash Transfers an Effective Approach

The cash transfer required to offset the tax on basic foods as modelled by the Planning Institute of Jamaica would be a programme without conditionalities and, similar to the Bolsa Familía, would be given to the female head of household. There is a large body of international research on the success of the Bolsa Familia in reducing poverty, and producing one of the strongest economies in the world, which recently surpassed that of the United Kingdom.

In Jamaica's case, the universal welfare system using GCT exemptions is costing the country some $22b to achieve an effective subsidy of $2b to the poor. Conversely, the recent World Bank/Inter-American Development Bank review of the direct targeted welfare programme, PATH, concluded that its administrative costs are in line with world standards.

We believe that Jamaicans are capable of developing systems to benefit the poor that work very well. No policy should ever make the poor worse off than they currently are, and therefore a proven, competent and transparent cash-transfer system must be in place prior to any implementation that could put the poor further at risk.

Let us try to develop this system, which surely is not beyond us as a people, because Jamaica must be taken off its present path and put on one of real sustainable growth. As other countries try to achieve tax reform as the main plank to revive their economies, 70 private-sector associations in Jamaica have for the first time united around the principles of equity, simplicity, and efficiency, to design tax reform that will stimulate growth in our economy. It is not an option to retain the status quo which holds out no hope for our people.

Levelling the playing field

It is true that much work is left to be done, but work has begun. Let us examine some of the issues.

The discussion has touched on some of the objectives that we must achieve as a country, such as removing the opportunities for corruption created by the numerous GCT exemptions we now have. It has also been acknowledged that the tax exemption on basic foods provides unnecessary subsidies to higher-income earners in Jamaica, and that the selective waivers and incentives given to certain sectors have cost the country dearly and have resulted in high taxation rates on those sectors not so favoured.

It is these high taxation rates and the inequitable tax system that have been the major contributors to anaemic growth in our economy over the decades. Our economy, and in turn the standard of living of our people, have been held back in part by wrong taxation policies, and we cannot remain like this forever.

Therefore, there is an acknowledged need to change from the current system of taxation with the inequities outlined above, to one that puts the country on a better path while effectively protecting the vulnerable. This may be difficult, but is of utmost necessity.

Middle-Class Benefits also Critical

Measures proposed by the PSWG seek a taxation system that puts the country on a path to growth. While we welcome criticism and constructive feedback to our proposal, we would ask the key question, how are we going to reduce poverty and build back our middle class? This surely is the most critical task that confronts us. This is precisely what the tax-reform proposal has attempted to address.

The measures proposed include a significant 'give-back' to the middle class in the form of personal tax reductions (J$2b+), overall reduction in GCT from 17.5 per cent to 12.5 per cent (J$15b in total), as well as further relief from GCT on electricity consumed up to 300kWh (the latter measure leaving less than five per cent of Jamaican residents paying GCT on their electricity consumption). These are just some of the initial steps in the broader proposal to bring tax rates down across the board. They represent a start on the tax-reform journey, not the final destination.

Additional tax revenues generated through greater tax compliance and economic growth will fund further 'give-back', as rates may then be further reduced, contributing to greater alleviation of poverty and stress on the middle class.

Over the years, we have made a cliché of saying that we must grow our way out of our problem, and then there is silence on how exactly we will accomplish this. Whatever has been tried has failed to bring real economic growth and development for Jamaica, and we can't wait much longer, given the dire state of our economy.

One of the fundamental principles underpinning the tax reform is the stimulation of the economy in order to realise real sustainable economic growth. The proposal specifically sets out a suite of measures that work in tandem to produce the optimal outcome only if adopted altogether. Political cherry-picking will only serve to diminish the effects of this far-reaching reform package.

Responsibility of Registered Businesses

It has been incorrectly stated by some that the proposals give $5.5b to businesses by lowering of corporate income tax. However, there is another measure of a minimum corporate tax which should conservatively cost businesses $2b, and will for the first time bring all registered businesses into the tax net. What is saved by lowering rates of taxation on the few compliant, therefore, will be more than made up by widening the tax net to include all companies.

In our phased approach to implementation, most of the largest corporate tax-paying entities will continue to be taxed at 33.33 per cent in an effort to give fiscal space for the economy to reconfigure itself. A 15 per cent rate will apply to all other business activities, not just to traditionally chosen sectors or those with 'access' to the political directorate. This specifically will benefit the micro, small and medium-size companies across the board.

Taxation is most effective when there is greatest compliance. The aim of these overall measures is to improve compliance while producing a strong stimulative effect with a view to re-energising the economy.

The PSWG has undertaken this task on behalf of Jamaica, for Jamaicans, and we welcome any contribution to the discussion that makes for a stronger nation.

Joseph M. Matalon is chairman of The Private Sector Working Group. Email feedback to columns@gleanerjm.com and pswgtaxreform@gmail.com.