Tax reform - can we rise to the challenge?

Brian Denning, Guest Writer

The first part of this article appeared in the Financial Gleaner, August 26, 2011.

Where existing statutory incentives are unable to address the disincentives in specific instances, the only mechanism left in the short term to address the matter is by way of a ministerial waiver of tax.

The issue of tax waivers has been the subject of much public discourse recently, but many people fail to appreciate that the number and extent of waivers is symptomatic of the deficiencies in and the burdensome nature of our general tax regime. It also reflects our tardiness over the years in implementing comprehensive legislative reform.

To put it simply, if our general tax regime were more competitive, business friendly and efficient, the pressure for tax waivers would dissipate. In addition to allowing for a more transparent distribution of the tax burden, our public sector officials — including at a ministerial level — would be relieved of the very significant administrative burden that the current web of incentives, concessions, and waivers places upon them.

If we do not address this situation, then matters will get worse. As our general tax regime becomes more burdensome, we will be increasingly pressured to give further tax breaks, whether by incentive, waiver, etc, in an effort to stimulate desired investment. In doing so, we will drive ourselves further along a path we do not want to go — further narrowing our tax base, imposing new or higher taxes to sustain revenues, enhancing the incentive to evade taxes, further undermining the competitiveness and viability of the tax compliant business sector, and so on.

A key challenge will, therefore, be to secure some level of consensus among the various stakeholders as to what role tax incentives would play in our tax regime going forward, and how our general tax regime could be made more competitive to promote economic growth.

In this regard, it will be critical for the debate to be undertaken in an open and frank manner in the interest of the country as a whole, and not to allow the debate to descend to sectors pitting themselves against each another. It is not a zero-sum game.

There is a big world out there, and my prosperity is not dependent on your failure. Can we rise to this challenge?

SOCIAL WELFARE

If the moral test of government is how that government treats those who are in the dawn of life - our children; those who are in the twilight of life - our elderly; those who are in the shadows of life - our sick, our needy and our physically and mentally challenged, then we still have much to do.

While extensive and laudable charitable efforts are undertaken by the private sector, NGOs, and the general public in an effort to bridge the gap, these must supplement, not replace the State's responsibility in this regard. The constant cry however, is a lack of resources.

So how is this relevant to tax reform? The primary reason is that we have repeatedly used the tax system as a tool to deliver social welfare assistance to those in need. It has cost us dearly, however, because the tax system is simply not designed to achieve this efficiently.

Separate and apart from the gross inefficiency, some of these provisions also facilitate tax evasion, thereby making matters worse.

The classic example of this is the suite of GCT exemptions granted on a series of items deemed to constitute the shopping basket of our poorest members of society. This is undoubtedly well-intentioned, but the same items are bought by everyone else - and probably in greater quantities - so the tax forgone by Government is much greater than the value of the benefit accruing to those who we wish to target.

The Green Paper estimates that GCT forgone at the port from exempt goods imported is approximately J$5.3 billion.

The issue is further compounded by the fact that we have pushed our general GCT rate over the years in an effort to yield tax revenues needed from our general tax regime.

It is obviously more difficult, therefore, to remove exemptions in circumstances where the standard GCT rate is 17.5 per cent instead of, say, 10 per cent; and so any such removal should ideally be accompanied by a meaningful reduction in the standard GCT rate.

Textbook solution

How can we address this? The textbook solution is to replace the GCT exemption with a targeted expenditure programme so that the benefits could be delivered directly to the people most in need. If properly implemented, this should be much less costly and could even provide greater benefits than a GCT exemption, which does little to help those who cannot afford to buy the product in the first place.

The difficulty, of course, is that mechanisms distributing state-sponsored goodies tend to be costly, and are susceptible to corruption and partisanship. The Jamaican public does not need any convincing of this based on past experiences over the years.

While it is recognised that the matter is politically sensitive, this is a national issue and will remain so irrespective of which party is in power. So the question is, can we rise to the challenge of finding a bipartisan solution to this and then implement in a manner that we can all be proud of?

If you think that reforming our tax regime cannot impact our economy, then you should think again. By way of illustration, I draw your attention to just two recent tax policy reform changes which were announced by Minister Shaw in his 2011-12 Budget presentation in April.

The first was the removal of transfer tax/stamp duty to facilitate the development of the corporate bond market, and the second was the reduction of stamp refinancing/transfer of mortgages.

Both of these measures are having a positive impact and have contributed to the reduction in lending rates over the last few months. If you have a mortgage, this will have had a direct positive impact on your pocket.

By way of contrast, the recent significant reduction of taxes on motor vehicles cannot have helped in managing our country's massive trading deficit, which is at the core of our problems.

The above measures are just examples of how tax reform measures can have a direct and meaningful impact on our economy. Certain important steps have been taken, but we now need to move forward decisively to complete the job in the interest of Jamaica as a whole.

With the relative stability currently being experienced, can we now exploit this window of opportunity to undertake comprehensive, balanced, and transformative tax reform? The question is not whether we can rise to this challenge, it is, can we can afford not to?

Brian J. Denning is a partner at PwC Jamaica and a member of the PSOJ Economic Policy Committee.brian.denning@jm.pwc.com