By Al Edwards, Business Co-ordinator
Davies
THE NEED to garner more revenue from taxes has become even more apparent with the deficit for this forthcoming budget projected at approximately $30 billion.
More precipitously, an unsustainable deficit level could impact negatively on our debt rating on the international markets thereby restricting our ability to borrow even more funds which the Minister of Finance, Dr. Omar Davies has said he will have to do.
So what serves as a viable alternative? Widening the tax net to alleviate the debt burden. As of September of last year (the last official figures) the debt stock was recorded at $538.5 billion and is set to rise further within the final six months of the fiscal to $569.4 billion. Additionally, domestic debt which now accounts for 62 per cent of the total debt stock, will rise with the planned issuance of $11.5 billion in Government paper to cover shortfalls in the Bank of Jamaica accounts.
It appears inevitable with each passing day that the Government will have to turn to taxes but that too is fraught with problems.
Last month the international research body Group of Analysis for Development (GRADE) declared that Jamaica's informal sector accounts for 43 per cent of GDP with a dollar valuation placed at J$155,904 million. While this new study employs new methodology that focuses on four indirect measures that can gauge output, it generally supports an earlier study done at the University of the West Indies that had estimated the sector's contribution to GDP as high as 60 per cent in several periods leading up to the 90's.
The GRADE study divided up the informal economy into three distinct categories: (1)pure tax evasion, (2) the irregular economy, which covers the production of legal goods and services in unregistered and untaxed operations and (3) illegal activities. The study in no way measured the illegal economy, that is, economic activities which not only breach tax and regulatory laws but the criminal law. If this was brought into the mix, the true figure would register somewhere in the fifties, perhaps even sixties of GDP.
Earlier this week, Prime Minister P.J. Patterson, outlined the issues that were discussed at the Cabinet retreat held at Vale Royal over the weekend. He paid particular attention to ways in which to bring in more revenue via the tax net.
The Prime Minister, in making reference to the upcoming Budget, would not say if there would be increased taxation as that " is something the Minister of Finance holds close to his chest."
However, he said that in order to increase revenues "we have to widen the tax net and we also have to look at the proper charges by way of fees for the services that have to be rendered by the state and its agencies."
Also discussed was a plan of action to reduce the deficit and achieve a fiscal surplus by the end of Fiscal Year 2005-2006. So, can the tax net be effectively widened, indeed how can the Government extract even more revenue from people who are complaining that they already pay too much?
JOHN ISSA SUPER CLUBS
For the last ten years I have been a public advocate of widening the tax net. I think it is immoral for the Government to add new taxes when there are so many people outside the tax net. I once said of the PAYE system that it was the "greatest organised injustice in Jamaica."
Some years ago I conducted a little survey on the informal economy when the PAYE threshold was US$14 a week. I asked a number of MP's and Senators, do you have direct knowledge of people earning a seven figure salary who are not known to the tax man. They all answered yes. I further asked, then how in good conscience can you sit in Parliament and ask people who earn US$14 a week to pay more. I think that sums up the present system.
If there is a sector of the economy not burdened by tax then that sector will grow more rapidly than the formal economy. That in turn can lead to economic anarchy which is what we probably have now. When decent hardworking people are burdened with taxes and others can just flout the law it can be seen as justifying anti-social action.
I don't think it would be too costly to administer. One only has to watch those who have a fleet of luxury cars and travel overseas every other month and relate that to their income. It really is a case of cross referencing what people have with what they earn. You pick up The Gleaner and you see all these people offering goods and services in the classified pages. You can simply do some investigation to discover whether there is a correlation between what they have and what they earn and if they are not registered then you act accordingly. It doesn't have to cost the Government too much to make this effective it must be implemented and executed with vigour. We had some success on imposing a withholding tax on interest payments on LRS' and Treasury Bills and there were lessons that can be learned right there. We need to appoint a two or three man commission team separate and apart from what Clive Nicolas does to oversee the tax system and to ensure compliance procedures are met. These officers should have the same protection enjoyed by a high court judge and should be of impeccable character. This operation should be funded by taxes to ensure that the money they need is automatically there and not subject to the whim of politicians. They should be insulated from all the temptations and pressures placed upon tax officers.
KEITH COLLISTER FIRST GLOBAL
The Government needs to come up with a comprehensive deficit reduction package to restore confidence lost during the expenditures associated with the election campaign. This will involve explaining to the population the true state of our fiscal situation and the painful measures needed to deal with it.
This should be equally balanced between more effective tax allocation and expenditure cuts with tax increases as a last resort.
SPECIFIC AREAS FOR IMPROVED REVENUE COLLECTION
1. Privatising revenue collection at the ports with the goal of doubling revenue collection from custom duties as has occurred in some South African countries.
2. Increasing the collection of GCT again particularly at the ports with the goal of capturing the informal economy that evades paying taxes.
3. I believe that the Government should create an energy conservation and price stabilisation fund with the goal of smoothing the dramatic changes in the oil price while seeking to fund energy conservation, the environment and education. The timing of this fund would be perfect as it would finance itself by capturing some of the likely fall in oil prices post budget. Such a fund should only be set up with the agreement of the main sectors, for example the private sector, the unions and the Opposition should be represented on the Fund.
The reason why expenditure cuts should be preferred over tax increases (which should be as a last resort) I believe is that high marginal tax rates already reduces effort and increases evasion by driving people into the informal sector.
In Russia over the past year, a dramatic lowering of tax rates and simplification of the tax system has led to a huge increase in tax revenues. In Jamaica's case higher tax rates runs the risk of decreasing revenue in some cases due to our large informal
economy.
MILDRED MOSS STERLING ASSET MANAGEMENT
I think the decision to computerise tax data is a positive move. The emphasis should be placed on greater compliance as opposed to introducing new taxes. Our focus should be on growing the econony because we are now trying to extract new additional taxes from a contracting economy.
We must equip tax officers with sufficient information on individuals who evade paying taxes. In other countries certain categories of individuals are targeted. These tend to be people who own high end properties, those who travel abroad regularly and those who own luxury vehicles. We need to evaluate our entire system and decide whether it should it be overhauled. We must ensure that tax officers are adequately compensated.
As it stands presently the filing of returns is cumbersome and is prone to abuse. What is clear is that the implementation of on-line tax returns has not proved successful. We must dedicate resources to a workable collection method which is not easily subjected to abuse. We are already heavily taxed and it is a small group of people bearing the burden. We have people here driving luxury vehicles on bad roads and many of them do not come under the tax net. It must be compulsory for certain categories of people to comply and be seen to do so. But we must always remember that growth is essential if we have any hope of efficiently raising sufficient funds through taxes.
RAYMOND FORREST COLUMNIST
The widening of the tax net is possible but there would have to be more independent audits. Tax officers need to travel around the country and study comparable businesses and assess them.
Given the Jamaican culture, the tax office should offer a percentage of the income tax not paid by evaders to those who point them out to the authorities. This award should be made on prosecuted cases. This would be along the lines of the IRS in the United States. People in Jamaica will only come forward and disclose information if they know there is something in it for them.
ALOK JAIN ACCOUNTANT
In order to extract more taxes we simply have to move from direct to indirect taxation. Once you spend in the country you should automatically pay taxes. This method is easier to administer as income tax collection proves bureaucratic and costly. Taxes on goods and services removes the personal element. If tax officers said to businesses you now have to pay taxes on goods and services then I think the Government would rake in even more revenue.
By placing the burden on businesses there would have to be certain caveats. Also the common man should pay a reduced tax on certain items (food, clothes). I am of the opinion that the Government should reduce income tax and increase GCT. If you spend you pay taxes. I think this will help to reduce the level of bureaucracy in the tax system.
There should be increased taxes on two and three litre luxury vehicles, and the Government should get more taxes from cigarettes and alcohol. People shouldn't be excessively taxed on earnings rather they should be taxed on spending.
LISA GOMES GUARDIAN LIFE
The issues of widening the tax net and the deficit in the budget has everybody talking. The Government has to come up with creative ways to tap into the informal economy for its needs. The onus should be put on individuals to prove how they make a living and how they earn an income.
About 10 years ago, the Trinidadian Government took the initiative and sought to get people to file their tax returns on time. It also introduced GCT. If you do not comply with your tax obligations then that failure affects your ability to travel abroad. The Government was tough about this and it worked out for it. It really is a case of the Government committing itself to widening the tax net and ensuring people comply.
