Christopher Tufton, Contributor
The power to tax is the power to destroy...A government which lays taxes on the people not required by urgent public necessity and sound public policy is not a protector of liberty, but an instrument of tyranny.
- Calvin Coolidge, June 30, 1924.
IF WE were to consider the words of Calvin Coolidge, the 30th President of the United States of America (1923-1929), would we conclude that our Government has been tyrannical over the years?
I guess it would depend on who you talk to.
While it might be true that we are not yet among the highest taxpayers in the world, to the average Jamaican it must seem that way. For it is difficult for any of us to miss the tax man, as we face him at points of consumption, production and on income.
A more pertinent question therefore might be, do Jamaicans accept, either in perception or reality, that their tax dollars are being spent effectively and efficiently? In other words, are we getting the bang for our buck?
Many would argue no. One may point to the high and increasing debt burden, with very little to show. Others may point to the increasing user fees that are required to access vital services such as education and health care, while still others may point to the Auditor-General's report on waste and corruption in the public sector, as too many examples of our tax dollars being mismanaged.
TAXATION FOR REPRESENTATION
Let's face it, paying taxes is inescapable, and is important for any functioning society. In the words of another US President, Franklyn D. Roosevelt, in a speech to the US Congress in 1933, "Taxes after all, are the dues that we pay for the privilege of living in an organised society." Well OK, perhaps Roosevelt might have been stretching a little to serve his own agenda. However, one cannot deny that without taxes, Governments don't stand a chance of functioning in any capacity.
But what if after paying the taxes, the society remains disorganised, or worse, more impoverished? In these circumstances, the taxpayer loses confidence in the capacity of the Government to effectively utilise his tax dollar. It is no longer the taxes or a lack of it that becomes the problem, rather the problem is those entrusted to collect and manage the tax revenue.
For the People's National Party (PNP), this might have been the reason for their loss in the Local Government elections, coming so soon after their electoral victory at the general elections. The announced tax package back in April was just too much to bear, particularly within the context of Dr. Davies' infamous comments concerning imprudent political spending during the period leading up to the general elections.
JUSTIFY EXPENDITURE
In moving forward, the Government is well advised to place a greater emphasis on justifying the need for and uses of the taxes that are being collected from the citizens. This speaks to transparency and accountability, but also effective representation.
Otherwise the taxpayer does not perceive value for money and becomes unwilling and cynical. Already there are many who feel they should pay very little, if any at all. Many others accept that taxes are necessary for any functioning society, but are displeased about paying because of obvious waste and corruption. Our Government must stop taking taxpayers for granted and accept that taxes must be linked to benefits provided; whether roads, water, hospitals or schools.
In aiding this process it is important to ensure simplicity in the tax calculation and collection arrangements. If the process is cumbersome and difficult to apply, this is likely to be a disincentive to would-be taxpayers. In these cases, tax policy can become counter productive, discouraging economic activity, or where these activities persist, there is motivation to go underground.
THE INFORMAL ECONOMY
Back in July this year, the Government, through finance minister Dr. Omar Davies, revealed that our economy has a large informal sector.
The International Labour Organisation (ILO) defines the informal sector as all activities by workers and economic units that are, in law or in practice, not covered or insufficiently covered by formal arrangements. These can include activities that can either be operating outside the formal reach of the law, or if they are operating within the legal framework, the law is not applied or enforced.
Although definitions vary, the distinction is usually made between illegal activities and activities that produce legal goods and services but are not captured within the formal economic framework. The informal economy therefore primarily includes unreported income from the production of legal goods and services.
The Government study released in July this year concluded that at least 43 per cent of GDP in the year 2001, or $155.9 billion, is explained by tax evaders of registered companies, small unregistered companies, and other forms of illegal activities, excluding the drug trade. This should be of concern to the Government. However, it should be noted that this dilemma is not just a Jamaican phenomenon, but a problem faced by many countries.
In a report titled Decent Work and the Informal Economy released by the ILO at its 90th International Labour Conference in 2002, it was highlighted that the informal economy has been expanding rapidly in many countries in the world.
In Africa, for example, informal work account for approximately 80 per cent of non-agricultural employment, 60 per cent of urban employment and more than 90 per cent of new jobs over the last decade, the report says.
Similarly, the World Bank reports on a study conducted by Simeon Djankov which concludes that in Africa the informal economy is classified as a parallel economy, averaging 42 per cent of GDP but as high as 59, 58, and 57 percent in Zimbabwe, Tanzania and Nigeria respectively. In Latin America it averages 41 per cent of GDP with Bolivia recording more than 67 per cent, while Chile recorded 19 per cent. In Asia, Thailand reported over 52 per cent informal activity while Singapore reports 13 per cent.
The large informal sector cannot be good news for any Government. In Jamaica's case, the huge debt burden, a relatively stagnant economy, and an already overtaxed formal sector, makes it an understandable desire on the part of the Government to capture all economic activity. This is not likely. However, a reduction in this activity is possible, beginning with an understanding of the dynamics of this informal sector, its structure and motivation.
Studies have shown that outside of the obvious deviants, motivated by greed and the desire to 'beat the system', there are many otherwise law-abiding citizens who risk being held legally liable by opting to stay outside of the official economy because of bad Government policy. In fact, based on the generally accepted definition of the informal economy, it is evident that a large segment of this group is involved in the production and consumption of legitimate goods and services and in the process creating a livelihood for thousands of Jamaicans.
CAUSES AND RESPONSE
The Planning Institute of Jamaica (PIOJ) announced in June of this year that they were embarking on a survey of over 2,000 small and medium size businesses to further understand the nature of the informal economy. No doubt the PIOJ, acting on behalf of the Government, is determined to address any obstacles that might encourage these small and medium size companies to pay their fair share of taxes.
A World Bank study gives some indication of possible causes. The study indicates that among the causes of the large and growing informal economy are high and complex Government taxes, excessive Government regulation, particularly in areas such as business start-ups, and labour market regulation. The study speaks to the need for Governments in countries with huge informal activities to address issues related to red tape and labour market reform, issues which, for the most part, we have given lip service to here in Jamaica.
In another study conducted by professor of Economics Frederick Schneider, the conclusion is similar. He links the size of the informal economy to Government policy and inefficiency. These include, the burden of direct and indirect taxation where the higher the actual or perceived burden, the greater the incentive to engage in the informal economy, the burden of excessive regulation or red tape which tends to provide an incentive for economic actors to side step the official regulatory framework, and attitude towards the State by the citizens; the less confidence in the State the greater the motivation to engage in the informal sector.
These studies do not necessarily reveal the full extent of the problem. They do, however, highlight Government's own role in creating an informal sector. As the PIOJ embark on their study, they are well advised to consider these issues. More importantly, the Government is well advised to act on the findings.
Dr. Chris Tufton is a Lecturer in the Department of Management Studies, UWI and Gen. Sec. of Generation 2000, an associate organisation of the Jamaica Labour Party. Send your comments to cctufton@yahoo.com.
