Government's policies have disregarded growth

Claude Clarke, Contributor

By any measure, the Government has excelled in faithfully pursuing the programme it agreed with the International Monetary Fund (IMF) last year. It is a programme as much distinguished by what it includes as what it fails to address.

It was always clear that a fiscal programme which removed resources from the economy through increased taxation and reduced Government spending, albeit to pay down the country's debt, would diminish the country's capacity to create economic value. Yet the programme did not specifically include a strategy to increase economic output, even to offset the economy's predictable contraction. Now, just eight months into the programme, the inevitable is occurring: the extraction of increased taxes from a contracting economy is proving unfeasible. Revenues are running $9 billion behind budget so far this year. To compensate, Government has cut back its expenditure, with all the contractionary implications this brings.

As critical sectors like manufacturing continue to decline, it is becoming clear that without a realistic growth strategy, the impracticable goal of extracting greater revenues from a contracting economy will continue to recede.

Some hope might have been drawn from Government's IMF-imposed obligation to reform the tax code. One might reasonably have expected that such reform would be geared towards directing investment capital to productive activities, thereby increasing productive output, stimulating employment and growing the economy.

Of course, as with all of the IMF's demands, the Government was faithful in developing a tax-reform package. However, the package, while bearing the label 'reform', does anything but induce capital to invest in production.

When the IMF deal was announced, I expressed the view that contracting the economy while increasing tax revenue would be counterproductive and self-defeating and would harm rather than help the economy.

I also said the reform of the tax code was among the most effective ways of guiding the economy towards greater productive output and growth. I stated then that what the Government must do is ensure that any tax reduction serves a productive purpose, namely, to incentivise the holders of capital to invest in production. I also strongly advocated the implementation of a progressive tax regime; offering taxpayers the possibility of using tax credits to bring their effective tax rate down to 15 per cent.

Reward for Tax Compliance

The Government has adopted the principle of corporate tax credits but, notwithstanding the measure being labelled 'Employment Tax Credit', they have been used as a reward for tax compliance rather than for investments in production or for increasing employment. Tax credits are going to be doled out in the hope that the retained income will be used by corporations to achieve those ends.

The naiveté of Government's belief that corporations, which hitherto shunned investing their capital in production, will develop a sudden enthusiasm for productive investments because they have been handed more money by Government, is staggering.

Were tax credits used as reward for actual investments, the question of the use to which corporations would put tax concessions would not arise. Regulated companies which generate the largest profits would also be included; and their high level of profitability would greatly expand the potential pool of capital from which investments in production could be induced. Their exclusion from access to the so-called investment incentives is evidence that the Government's tax-reform programme has far more to do with collecting taxes early, than with encouraging economic growth.

STRUCTURAL COMPETITIVENESS

I have long held the view that other than ensuring the structural competitiveness of the economy, the tax code is the most potent and effective instrument available to a Government to shape desired economic and social outcomes. It is more effective than anything else in encouraging or discouraging the economic behaviour of individuals and corporations.

There is no excuse for the Government's failure to design a tax-incentive package capable of attracting a good deal of the massive corporate profits generated in the country to the purpose of development. In Jamaica's present economic predicament, this tool should only be used to realise clear economic and social results.

A couple of decades ago, it was recognised that an inner-city address on an employment application virtually guaranteed the applicant's rejection, and that this was a major contributor to poverty, crime and disorder which oppress those communities. A committee which I headed recommended that the unhealthy trend be addressed by giving employers tax credits for employing such persons. It was an arrangement that would not only have had the effect of allowing businesses to lower their tax rates but would provide a significant lift to the country's social and economic conditions. The idea got nowhere.

Now the Government of a country with a withering crime problem and desperate for economic growth is prepared to reduce corporate tax rates by almost half, from 33¹/3 per cent to 17¹/2 in exchange for companies merely honouring their legal obligation to pay taxes on time.

The finance minister is to be commended for the progress made in streamlining and simplifying the tax system and for the new 'rules-based regime' he has adopted. These changes will contribute considerably to the ease of doing business and to improved efficiency in collecting taxes. But while these advances will be beneficial to the economy, they are not a substitute for specific fiscal measures to attract capital to production.

The new tax-incentive regime targets nothing but tax collection. It has missed the opportunity to promote economic and social goals, which could be achieved with a strategically targeted approach of tying tax credits to productive investments and increased employment.

The dubious belief that productive investments and employment will result from lower corporate taxes has been discredited by our recent experience with the removal of the tax on dividends in Jamaica, and by President George Bush's 1990s tax cut for the rich in the US. Both were expected to spur investments in the respective economies, but had the opposite results.

In Jamaica's chronic low productivity, low production, low growth state, more is required from the finance ministry than measures to collect taxes to keep the fiscal books balanced.

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