Tax reform: why it's relevant to you!

Brian Denning, Guest Writer

As a tax practitioner, I have been regularly asked over the years what we must to do to reform the tax system in Jamaica. Increasingly, my response has simply been "just do it!" - to borrow a tag-line of a well-known sporting goods manufacturer.

Before I get into what we can do and how we can get there, the first step is for us to understand what the term 'tax reform' means and why it directly impacts you as an individual as well as our wider society.

It is important to note that reform means 'to change for the better', that is, for the good of our society. It is not change in the interest of expediency or just for the sake of change. It should be just, rational and form part of an overall strategy which is consistent with our national objectives.

So 'tax reform' involves changing our tax system - including how it is administered - in a way that enhances our society. At this point, you may well ask why this is relevant to you, since Jamaica already has a system that extracts taxes at every turn. Here's why.

Our tax system directly impacts both your daily life and that of your wider community. How much money the Government, both central and local, has to spend on delivering public services is primarily determined by our tax system. So when you lament about the availability or efficiency of such public services - whether utilities, transportation, policing and the justice system, health care, education, pensions and social welfare, environmental protection, etc - or you complain about the state of public infrastructure, for example, our roads, bridges, gullies or drains, you should also remember that our tax system has a direct and strong impact on these issues.

Growing up, my mother instilled in us the importance of cutting your cloth to suit your measure. In other words, do not spend what you do not have.

This simple rule applies not only to individuals and households but also to countries. Unlike individuals, however, countries have easier access to borrowing, which allows them to spend what they do not have.

In many instances, this is justified as being necessary to provide a minimum standard of public services in order to properly function as a nation. This strategy is clearly not sustainable, though: at some stage you must pay the piper.

Further borrowing to fund revenue shortfalls leads to greater shortfalls which require further borrowing, and so on. As a result, more tax revenues must be diverted from critical public services to meet interest and principal repayments on an ever-mounting national debt burden.

Sadly, we know this story only too well in Jamaica, as we have accumulated total borrowings of close to J$1.5 trillion, or roughly J$550,000 for every man, woman and child in Jamaica, over the many years of spending beyond our means.

In the fiscal year 2009-10, which ended March 31, Central Government generated total revenues of J$300 billion but incurred expenditure of J$421 billion, with the shortfall having to be funded by further borrowings.

There is only one sustainable way out of this downward spiral to destruction. When you manage your household budget, you already know what the solution is - spend no more than you earn.

So at a national level, we must generate sufficient revenues in order to meet our day-to-day expenditure and fund development - infrastructure and otherwise - while also reducing our dependence on borrowing.

As the song goes, it's not an easy road.

Our tax regime, as the primary generator of national revenues, must be a critical part of the solution. If the system works well, it not only delivers healthy tax revenues but also assists in stimulating business activity, investment and economic growth - which, in turn, generates more tax revenues.

What a great system! It might even pay to fix that big pothole on the road just outside your house - you know, that big one on the left-hand side.

Get it wrong, however, and our tax system yields inadequate tax revenues to provide critical public services; it acts as a disincentive to investment and economic growth; it pushes taxpayers into the informal economy and facilitates corruption; and by the way, that pothole just gets bigger and bigger.

So where do we go from here? Jamaica has ranked among the 10 most difficult jurisdictions in the world to pay taxes, based on 2010 Paying Taxes - A Global Picture, a joint publication of the World Bank and PricewaterhouseCoopers.

In fairness, much effort has and is being made to implement a series of administrative reforms but clearly we still have much room for improvement.

The good news is that a tremendous amount of work has been done in evaluating the Jamaican tax system over the years and there are extensive documented recommendations for reform. Having actively participated in several collaborative initiatives between the public and private sector on the topic of tax reform, I am also encouraged by the trust and level of consensus displayed in the course of these deliberations.

The big challenge however, not surprisingly, is implementation. To achieve this, you as a member of the public - yes, I am talking to you, have an important role to play in pressing for this reform to take place. Before you do this though, you will need to acquaint yourself with the relevant issues in order to take an informed position.

In the next article, we will explore together some key features of a good tax system and consider how our current tax regime stacks up.

Brian J. Denning is a taxation specialist and Partner at PwC Jamaica.

brian,denning@jm.pwc.com