Tax reform essential to economic growth
Published:Friday | September 10, 2010 | 12:00 AM
Don Wehby,Guest Writer
Tax reform is essential to creating a tax system that is more effective, efficient and that encourages full participation in the formal economy.
As a member of Jamaica's private sector, advocating for reform is important, as a tax regime that is business-friendly, provides certainty and does not impose undue compliance burdens should facilitate investment and economic growth.
With an International Monetary Fund (IMF) agreement in place, it is unclear how tax reform at this time would impact prevailing conditions and affect the present agreement.
However, tax reform is a critical component of encouraging eco-nomic growth by lowering the government deficit and encouraging investment, thereby creating a virtuous economic cycle.
In 2007, Professor Vito Tanzi, a renowned tax expert from Italy, explained this mechanism:
"In Jamaica, the budget deficit has remained on the high side ... thus, some fiscal tightening would be desirable. If this tightening occurred, and the economy continued to perform well, it could initiate a 'virtuous cycle', a cycle that would progressively reduce and eventually eliminate the fiscal deficit, making it possible to reduce the public debt and increase the income available to the Jamaican authorities for domestic non-interest spending."
Analysts frequently estimate that Jamaica's informal business sector equates to approximately 40 per cent of formal GDP. An oft-cited reason is the difficulty in paying taxes. Jamaica ranked extremely poorly (170 out of 178 countries) in the World Bank report on economies where it is most difficult to pay taxes due to the number of different tax types, payment dates and tax rates, titled 'Paying Taxes in 2008 - The Global Picture'.
Another 2007 IDB-com-missioned report used filed returns data to estimate that: a) 1 per cent of corporations in Jamaica pay 71 per cent of corporate income tax (CIT) collected; b) 1 per cent of registered entities account for 60 per cent of PAYE collected; and c) 1 per cent of corporations pay 58 per cent of the GCT collected.
These numbers are startling.
While these reports should be updated to track the progress made in the past two years, my calculations show that if we can improve these figures by 50 per cent, we will be able to reduce CIT, PAYE and import-duty rates, providing a boost to economic activity.
The PAYE person has unfor-tunately borne the brunt of the tax burden in what is currently in an inequitable system.
Current efforts by the Jamaica Customs Department and the Inland Revenue Department to target tax evaders are commendable attempts to enforce compliance in Jamaica.
The freeze on all new waivers, implemented in August, and the plan to reform the tax incentive system should also help to significantly reduce leakages that occur through the granting of discretionary waivers.
These waivers have historically been granted in a haphazard, piecemeal fashion that has proved costly to manage and, therefore, must be reformed. Going forward, all waivers should be published on the Ministry of Finance website for greater transparency.
It is also important that information technology reforms be implemented as a priority to streamline the tax administration process and make it easier for Jamaican businesses to meet their obligations.
The Integrated Computerised Tax Administration System (ICTAS) that is currently in use needs to be enhanced to fully integrate the real-time use of TRNs.
Additionally, the scope of electronic payment and filing of taxes should be significantly expanded to improve tracking and further encourage compliance. I know good progress has been made in this area.
Jamaica hopes to attract highly specialised activities such as those required of an international financial services centre.
Examining the feasibility of mixed income tax systems should be a priority if we are to definitively enter this space.
I would also recommend that the tax credit 'top-up' scheme put forward in A Blueprint for Tax Reform in Jamaica should be incorporated into the tax incentive overhaul.
Mega-project investors
This scheme would establish an account for mega-project investors where, in lieu of waivers, the Government would credit a predetermined amount to the account for use by the investor toward settling his tax obligations. The funds would then be released based on agreed performance criteria.
If we are thinking outside the box, why don't we analyse a 'flat tax' system?
The flat tax introduced in Slovakia in 2004 is a case study in how robust tax reform can help spur economic growth. The flat tax applied a 19 per cent tax rate on all personal income, corporate income and consumption with minimal deductions or exemptions.
The low-rate, consistent regime resulted in increased compliance, an improved business environment and, coupled with other macroeconomic reforms, contributed to a high average growth rate of real GDP of 5.5 per cent between 2005 and 2009.
Finally, but very importantly, a bipartisan approach to tax reform and the engagement of the private sector are essential to reform success in Jamaica.
I must heartily agree with the governor general in his Throne Speech at an opening of Parliament that the "Government and the Opposition must set the example and be constantly engaged in a new dialogue, respectful of their differences, but deeply mindful that the Jamaica that unites us is infinitely greater than the political parties that divides us".
Don Wehby is group chief operating officer of GraceKennedy Limited.