Reviewing trio of tax-reform plans

Edward Seaga

Proposals have been submitted from three agency sources, largely, for tax reforms in accordance with the agreement with the IMF team reviewing problems of the Jamaican economy. These agency sources are: the Government of Jamaica (GOJ), Inter-American Development Bank (IDB) and Private Sector Organisation of Jamaica (PSOJ). The GOJ offered 23 proposals, the IDB, 13, and PSOJ, 25. A small number of other proposals submitted which concurred with one or more of the main submissions are included here. Their views are designated 'other proposers'.

In this mix, there is a great deal of overlapping since all the proposals deal with the same categories of taxes: customs, general consumption duty (GCT) and income tax - personal (PIT) and corporate (CIT), principally. To avoid repetition, in the interest of space, I will highlight the main proposals principally indicating the agency sources involved and their views:

GCT

a) Reduction of GCT rate from 17.5% to 12.5% [PSOJ] [IDB]; 12.5% or 15% [GOJ].

b) Tourism rate to remain at 10% [IDB]; increase to 12.5% [PSOJ].

c) Removal of modernisation of industry (MOI) and GCT referral schemes [PSOJ]

d) Reduction of GCT from 10% to 0% on the first 300 KwH/month residential electricity use [PSOJ].

e) Increase in GCT from 10% to 12.5% for residential consumption exceeding 300KwH per month to compensate for (d) [PSOJ].

f) Immediate GCT credit on purchases of capital goods [IDB]; for all capital goods and all taxpayers, not just manufacturing sector [other proposers].

g) Advance GCT tax of 5% on imports on all commercial goods (excluding private individuals, bauxite and petroleum) [IDB] [other proposers].

h) Imposition of the advance tax payment [ATP] on the CIF value of all imports (with limited exceptions) at a rate of 3% for all authorised economic operators (AEO) and 7.5% in any other instance [PSOJ].

i) Reduce GCT-sheltered supplies from 41.7% to 30% (goods and services sheltered from GCT tax ) including food (to yield $10 billion) [IDB], excluding food [GOJ].

j) GCT zero-rated sales to be reduced from 9.8% to 0%, except exports [IDB].

k) Full GCT withholding tax on government purchases [IDB]; explore as long-term goal (other proposers).

l) Partial GCT withholding tax payment on large taxpayer purchases [IDB]; explore possibilities [other proposers].

m) No discretionary waivers [IDB]; significantly reduce discretionary waivers and institute rules for exceptions [other proposers].

n) Amend GCT Act and other relevant legislation to facilitate one tax type being set off against another [GOJ].

Customs

o) Abolition of the following fees: advanced GCT, customs users, environmental levy standards compliance fee [PSOJ].

p) Introduce new customs user fee (CUF) of 5% by consolidating four customs fees.

q) Reduction of highest trade tariff to 20% if CUF is 5%; or 25% if CUF is 3%.

r) Relief from customs duty and additional stamp duty (ASD) for all non-consumer goods used in the production of goods and services [PSOJ].

s) Relief of customs duties and additional stamp duties for a specific list of consumer goods used as critical productive inputs by manufacturing, agriculture, tourism and service sectors [PSOJ].

t) Amend GCT Act to apply simple interest to penalties and surcharges.

Income Tax

u) Reduce statutory CIT from 33 1/3% to 30% and PIT to a level enabling hotel workers to allow for their payment of NHT, etc. [GOJ option: PIT 20% depending on cost]

v) Amalgamate education tax with PAYE to simplify payroll taxes [GOJ]

Other Proposals

w) Prepare Omnibus Tax Incentive Legislation to bring all granting of tax benefits under one umbrella [PSOJ] and [GOJ]

x) Prepare a Charities Act [GOJ]

This potpourri of tax proposals can be simplified by noting that, in the main, they are intended to:

i) Reduce the onerous tax burden on producers by decreasing taxes applying to the productive process and allowing offset with other taxes;

ii) Spread the tax burden wider by transferring some direct taxes to indirect taxes, that is, from the few to the many taxpayers;

iii) Removing much of the relief given on most of the items spared from GCT tax in order to increase the number of taxpayers to broaden the tax base;

iv) Compensating for tax revenue lost by increasing the rate and imposition of new taxes;

All three agency sources set out proposals for revenues lost by some tax measures to be recovered from others in order to arrive at a revenue-neutral position. The overall position includes increases and decreases in revenue which are expected to cancel out each other to provide a revenue-neutral package. This raises some major concerns:

The revenue-neutral GCT scheme proposed will result in the poor paying more from the little they have. This has led the PSOJ to call for establishment of a special fund to compensate the poor. But this is problematic:

Who will determine the definition of poverty, bearing in mind that the classification of poverty already operational under the PATH programme takes care only of the poorest of the poor, the 'sufferers'? Where and how is the poverty line to be drawn?

How can the large group of 'strugglers' (vendors, tradesmen, petty businesses, etc.) cope with the complexity of GCT reporting to file the required documents? This is a serious impediment which would defeat the prospects of compliance.

When the food-stamp programme was introduced in 1987 as a compensating mechanism, the intent was defeated when the value of the stamps was simply discounted at shops by recipients to get cash, not food. The programme was abandoned and replaced by subsidies to the trade on a selected basket of food items used heavily by the poor. But this had the unintended result of benefiting the rich with the poor.

Subsidies for special income groups are not easy to devise, as the huge bureaucracy which manages PATH will admit.

The solution could be to replace the GCT with a 10% sales tax as a straightforward added cost to the sale price, a far easier and more practical solution which eventually everyone could manage. No 'input and output'. This is what I wanted when GCT was conceived in my regime in the 1980s, but the technocrats argued strongly for GCT citing that some of the many taxes to be packaged in the GCT would be difficult to fit into the sales format.

With this simplification of a sales tax, everyone would participate in costs and benefits which are transparent.

The major concern is that this package of reforms which is structured on a revenue-neutral basis can be dismantled by changing the tax values to increase or decrease taxes to fill the needs of the revenue. This is precisely what happened to GCT, which was first proposed at a 5% level in the 1980s. By the time it was enacted in the early 1990s, it was 10%. Currently it is 16.5%, which it is now proposed to reduce in this package.

Importantly, the total package is supposed to be delicately balanced to provide a stimulus to the productive sector, but unless the arrangements are fixed in order to remove further tax changes to upset the balance, the stimulus could be watered down for immediate short-term revenue at the cost of intended future gains, defeating the reforms.

The 2.5 % education tax in the early 1980s was introduced to assist education. Although it has been misused over the years, it should not be dumped into general revenue in the Consolidated Fund for general expenditure, which is virtually what happens now. There is a far greater use to which it can be put in the interest of educational reforms.

First, as a tax, there is compulsion of collection that can be relied on. If the education tax is designated as repayment for specific long-term, low-interest educational bonds for a statutory educational trust which should be established, it would offer to bond holders much more financial security than reliance on the faith and credit of government.

Second, the education tax is roughly $14.5 billion this year. This could provide for a sinking fund contribution for a substantial loan dedicated to investment in educational reform. God knows there would be few, if any, more worthwhile investments than the launching and funding of a Jubilee Educational Trust.

Overall, much commendation is due to the Ministry of Finance, the IDB and, particularly, the PSOJ for their very comprehensive proposals.

The presentation submitted here is simply a summation. Indeed, nothing has been mentioned of the multitude of options proposed for costs and benefits of the proposals from which to select a revenue-neutral package. This is where discussions and negotiations will be necessary to reach satisfactory conclusions which do not overstress the revenue.

This tax package should ensure continuity with the 1986 package by retaining a flat tax rate for both personal and corporate income taxes which greatly simplify transparency and ease of compliance. It should also retain the undeveloped value of land as the basis for property tax valuation to expedite the valuation process. Both these measures removed onerous difficulties in computing income tax payments, avoiding overtime hurdles and creating a smooth valuation system for tax purposes.

Edward Seaga is a former prime minister. He is now chancellor of the University of Technology and a distinguished fellow at UWI. Email feedback to columns@gleanerjm.com and odf@uwimona.edu.jm.