Withdrawal tax: 'cruel and iniquitous'?

Martin Henry

Tempers have not even cooled down over the contentious service charges that banks have been piling upon customers while making astronomical profits, when along comes the minister of finance to further rile up the people with a tax on their withdrawals from financial institutions!

Never mind that properly conducted investigations have established that the charges by banks in Jamaica for a variety of services to clients are not out of line with international practice, hard-pressed Jamaicans are up in arms over having to pay over another dollar to Big Business or to Government.

Dr Peter Phillips has reneged on his 'promise' of no new taxes, a promise which should never have been made, and, certainly, should never have been believed by sensible people. Under IMF strictures, the Government has been compressing Budgets over the last couple of years. And this year's Budget is down to $540 billion. The Government needs a very modest $6.7 billion to plug a hole in the Budget now before the supplementary estimates start arriving. Although, with the new fiscal rules legislated under the IMF, there is now little room for wholesale revisions of Budgets.

Tiny tax package

The new tax package of $6.7 billion is only a tiny 1.24 per cent of the total Budget. The sort of margin for which a government and minister of finance ought to be commended. Except that people are so angry.

As part of the tax package, the Government is imposing a levy on withdrawals made from financial institutions to raise $2.25 billion of the amount. Dr Phillips says this is really a tax on the banks; but he very well knows that the profit-hungry, cartelised banks are going to pass the charge right along to their clients. This is really no better than the promise of no new taxes.

But what is Phillips to tax if the Budget hole is to be plugged without new borrowings? Nobody is in any mood to listen to his laboured delivery of even more unpleasant alternatives which the Government has avoided, like upping the GCT rate and pulling more items into the GCT net, or raising the income tax rate. Or, God forbid, interfering with the super tax on flammable gas!

When the hysteria dies down, as it will, and calm analysis is allowed to prevail, as it may not, it will be very obvious that the financial services withdrawal levy is a 'good' tax and much more preferable to many other less innovative alternatives.

By 'good', I only mean technically good based on the principles of sound taxation and not morally or ethically good. On one thing Minister Phillips is quite correct: This new tax out of the blue is not any kind of significant burden upon what, harking back to his socialist days, he terms the 'broad mass'. At a rate of 0.1 per cent for withdrawals below $1 million, a withdrawal of $1,000 will be taxed only $1; $10,000 will be levied a mere $10! This is the sort of level of financial transactions in which the 'broad mass' engage on a day-to-day basis. Even a withdrawal of the maximum $1 million at this rate will attract a tax cost of only $1,000. The money will be raised lightly spread over a large number of transactions.

The tax is technically a good tax on sound taxation principles for a number of reasons: It is a very low rate and comparatively painless. It is a wide net covering the majority of the adult population and even children who use financial services and also use a range of government services paid for by taxes.

The tax is perfectly collectible with points of transaction collection being done instantly by a relatively few business organisations who are the real taxpayers in this instance. It is perfectly trackable in an ICT-mediated system which can be monitored by Government and from which real-time data can be instantly extracted.

No collection 'nightmare'

Don't let the financial institutions, many of them quite rich and profitable, try to fool us by crying "nightmare!" for collection. I am no IT expert, but I believe that with relatively minor adjustments to their IT systems, financial institutions can deduct or collect (if they are going to pass the tax to customers), compute, report and pay over the tax almost transaction by transaction. The real nightmare is with income tax and GCT collected by thousands of entities self-reporting on a quarterly basis with lots of leakages in the system.

This tax is a consumption tax of sorts. Good taxation shifts the burden of taxes from income to consumption and property holding. The ideal income tax rate is 0 per cent, and a few countries have it.

The financial services withdrawal tax, if it is to be paid by clients, as I think will be the case, has a good deal of latitude for avoidance. Clients can manage their number of withdrawals to minimise tax exposure. And this tax can hardly be evaded!

On these grounds, it is a good tax.

The financial services withdrawal tax closely conforms to the four principles of fair and just taxation long ago set out by Adam Smith in his Wealth of Nations:

I. "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

II. "The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person."

III. "Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

IV. "Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state." Adam Smith says a bad tax may extract much more than gets into the public treasury if it has high collection costs, if it discourages "the industry of the people", if its penalties destroy enterprises, or if it triggers extensive evasion by disgruntled taxpayers.

Going a little below the surface with just a 'tups' of knowledge about human nature, the massive public outcry against the financial services withdrawal tax has very little to do with the burden of the tax or its perceived inequity.

Opposition playing politics

It may be regarded as good politics for the comeback Opposition Spokesman on Finance Audley Shaw to call the tax "cruel and iniquitous", and for the JLP-affiliated G2K to be whining for a rollback. No! But this is not good politics. It is the kind of politics, playing upon public disquiet and promising the moon on a silver platter, which has landed us into the horrendous debt trap.

The root of the simmering public anger over the tax is the quite reasonable sentiment that we are overtaxed but underserved by Government despite the massive tax load. There is deep resentment over more for less as we conveniently forget that this year, 43 per cent of the Budget goes to paying down the national debt, which earlier bought us public goods and services the country could not afford from tax revenues. Debt servicing is down from a high of above 60 per cent of the Budget just a few years ago.

A large part of the counterargument to the imposition of the financial services withdrawal tax is to cut the fat in Government and to collect other taxes due. We are adept at muddying the waters by mixing issues. Tax reform has been under discussion for years and is now a critical part of the IMF programme. But no government (not one with Audley Shaw as minister of finance - or prime minister!) could sensibly rely on unpredictable public-sector reform and tax reform to plug the Budget hole.

What we should hope for, and fight for - both inside and outside Parliament - is that Government does not let up on the longer-term reform processes which should lead to a progressively reduced tax burden, starting with income tax and taxes on profits and interest.

Martin Henry is a university administrator and public-affairs analyst. Email feedback to columns@gleanerjm.com and medhen@gmail.com.