Keith Collister, Contributor
Tax czar Vinette Keene. - File
THE PREPARATION of the Budget, while always difficult in Jamaica due to our excessive debt burden and the associated interest costs, is likely to have been unusually difficult this year.
The combination of last year's poor tax revenue performance, combined with the effect on the expenditure side of the clearly legitimate desire of the public sector to 'catch up' at least part of their losses in real wages, appears to have caused the further pushing back of the balanced budget target.
The considerable challenge now facing the authorities is to raise sufficient revenue to meet our ever present needs for greater expenditure in a manner that is fiscally prudent but does not stifle the best growth prospects we have had in a long time.
NO NEW TAXES
The first requirement is that there should be no new taxes in the current budget. Last year, the effect of the huge rise in oil prices on the price of gas and electricity consumption was the equivalent of a huge increase in taxation of these items, except that the revenues would unfortunately have been paid to the oil cartel OPEC rather than the Government.
Ironically, the rise in 'taxation' from this oil shock would have been much higher than any taxation that was proposed in the Matalon report, whether they had applied GCT to gas or electricity.
Moreover, the damage this 'shock' caused to domestic consumer purchasing power was clearly one factor in the very poor performance of GCT relative to budget.
A further rise in taxes would be counterproductive at this time, particularly as there is a very high risk that the current all-time high for oil prices could be substantially exceeded this year, further hurting consumer purchasing power, and potentially stalling the likely increase in future expenditure signalled by the recent sharp rise in consumer confidence (part of which rise may be due to the expected end of the MoU).
NOMINAL TAX
RATES TOO HIGH
The corporate tax rate of 33 1/3 per cent for listed (typically larger) companies is high relative to most of our regional competitors, especially for those local companies without large holdings of tax-free bonds.
This problem is compounded by the absence of group relief.
While it is unlikely that the Government will be able to lower the corporate tax rate this budget, in view of their revenue constraints, some indication of the way forward on these issues would be helpful.
THE PROBLEM OF INCENTIVES
While some companies are also able to get incentives, reducing their effective tax rate, the granting of these incentives is frequently arbitrary and always unwieldy.
Indeed, one could argue that our myriad incentives are a tacit acceptance that the corporate tax rate is too high, while also ironically acting to tilt the playing field in favour of foreign companies operating here and against our local companies.
The promised review of incentives needs to be accelerated, as a reduction in incentives would allow a fall in the corporate tax rate.
One interim approach might be to have a lower rate of corporate tax, say 10 per cent, on a specific industry, say tourism.
This could be extended to other industries, particularly those that we do not currently have or that are not significant in terms of their current corporate tax revenue.
URGENT NEED FOR
A LEVEL PLAYING FIELD
Because double taxation of dividends was only abolished for listed companies, Jamaica is now in the astonishing situation where the effective tax rate of large companies, i.e. listed, is lower than that of small companies, despite the apparently widespread desire to help small businesses.
A dividend-paying small company pays an additional 25 per cent on that dividend beyond the standard corporate income tax, or when calculated on top of the corporate tax rate, taxation constitutes half its overall profit.
Unsurprisingly, very few small businesses appear to pay a dividend. While some of this lost revenue probably merely inflates the PAYE numbers, as owners pay themselves a salary instead, it is likely that significant corporate tax revenue is lost through efforts at tax avoidance, and particularly from businesses operating 'underground'.
However, the biggest losses, while impossible to quantify, are undoubtedly from businesses that are never created as a result of this very high rate.
If we look at the vast number of tax-paying small businesses in the United States versus the very small number here, this may suggest a different approach is necessary.
I believe that the abolition of double taxation on small business would more than pay for itself, and that if it were done in combination with a business taxpayer regis-tration drive, it could lead to significantly increased tax revenue.
PAYE vs SELF-EMPLOYED
A noted tax expert recently estimated that there are three times as many self-employed as PAYE judging by the tax registration numbers, despite vastly lower receipts.
In a society where record keeping is poor, maths skills are low, and the cost of accountancy services are at First World levels despite our relatively low salaries, it is absolutely essential that we make tax compliance for the self-employed as simple, easy and cheap as possible.
Moving the deadline for the self-employed back a month, so that it is not at the same time as business, would also be useful, as it would allow the Government to concentrate on the larger accounts first.
I understand that an increased reliance on 'carrots' rather than the traditional 'stick' is yielding encouraging results for the tax department under its new tax czar, but this trend needs to be strengthened and encouraged, as with the tax department's limited resources, a voluntary compliance strategy can be the only way forward in all but the long term.
Compliant taxpayers need to be treated as the asset they are, just as citizens need to feel they are both being consulted, and getting 'value for money' in terms of services for their tax dollars.
ACCELERATED PRIVATISATION
In the short run, our weak economy is likely to mean weak revenues and a difficulty in balancing the budget.
Consequently, I think the Government should revisit the private sector proposal, which was part of the Partnership for Progress, to sell $12 billion in assets over the next two-year period, as this could help bridge the anticipated fiscal gap more quickly, and is preferable to borrowing money or increasing taxation.
