Cedric Wilson, Guest ColumnistFINANCE MINISTER Dr. Omar Davies' projection of a 20 per cent increase in tax revenue against the blank backdrop of no new taxes, has stirred a maelstrom reaction.
To make matters worse, by offering tax relief on agricultural inputs and funeral expenditure below $100,000, revenue collections has been set back by approximately $300 million.
Experts have expressed doubts on the grounds that technically, collection in any business is a headache, and with such an ambitious target, it is going to be more than a stretch. Some political analysts suggest that it carries the deceitful scent of an early election, particularly in light of a targeted budget deficit of 2.5 per cent of GDP. Others who are neither technically nor politically inclined have simply written it off as panglossian. But if we accept that a $358 billion budget is reasonable, given the prevailing constraints within the economy, two questions inevitably arise. First, would new taxes help increase the chance of increasing revenues by the projected 20 per cent? And, second, can Minister Davies deliver on his projections?
TAX RATE AND TAX REVENUE
From the day in 1974 that American economist, Arthur Laffer, sat in a restaurant with a couple of journalists and politicians and sketched a curve on a napkin explaining the relationship between tax rate and tax revenue, the concept of taxation has been irrevocably altered. Laffer presented a conceptual argument, which intuitively others knew for a long time. Essentially, it says: If the tax rate is increased, eventually it will reach a point where people are over taxed. Beyond this point, further tax increases will cause tax revenues to decline. If the last fiscal year is anything to go by, there are indications that Jamaica may have reached that point. And indeed, recently, the Finance and Planning Minister himself came perilously close to admitting that reality.
Undoubtedly, the hurricanes that came close to the island affected the economic output, which in turn impaired revenue intake. Additionally, the delay in implementing the increase in consumption tax in the tourism sector, may also have had a negative impact. However, the vagaries of nature and implementation lags may not altogether explain the shortfall in tax revenue.
But let us for the sake of argument assume that we have not reached that critical point of taxation what really is there to be taxed? Last year, the general consumption tax (GCT) was raised from 15 per cent to 16.5 per cent. March 2006 signalled the successful conclusion of the Memorandum of Understand-ing (MoU) with public sector workers, and now that the Government is anxious for a renewal, an increase in the income tax rate is off limit. Added to that, corporation tax is already high at 33.3 per cent, therefore, fiddling with it could invoke the wrath of a grumpy private sector. And forget about a gasolene tax. There are too many people without cars and others who seldom take the bus, sitting on street corners, who would be willing to block the roads and shut things down. It would, therefore, take an exercise in extreme creativity to find something to tax that would yield sufficient revenue and that would go down without a fuss.
POLITICAL ACROBATICS
So can this 20 per cent increase be achieved? But before we get there is the minister sincere about this target? Is the budget nothing but political acrobatics connected to an early general election? The minister has confessed to straying from his budget for political reasons in the past. Not that this justifies his action, but there is no indication that in the first place he has ever deliberately set out to deceive people while making the presentation. So it may be argued that there is no
reason to question the ethics of the budget given the minister's reputation for honesty. Yet, sincerity by itself cannot insulate a man from exuberance, even if it is not exactly youthful in this specific instance. So what does Minister Davies have to say about this?
TAX ARREARS
In presenting his case, Dr. Davies indicated that over the last fiscal year, through a special programme directed at the tax arrears from large companies, a sum of $5.6 billion was collected. This was $600 million more than the amount targeted. In order to enhance the expertise in the programme, international assistance will be employed in the area. Estimates vary but there is no denying that the Jamaican economy is materially larger than the size reported in the official statistics. Indeed, the underground economy is more pervasive than it should be, and the tax compliance rate is far lower than what it ought to be. By targeting greater efficiency in tax collection rather than finding ways of increasing taxes, the minister has elected to take the less-travelled path.
The projected 20 per cent increase tax
revenue may, therefore, be a bold step into tomorrow rather than superficial optimism. With the right incentives and a well-oiled machinery, it appears to be possible. We should wish him well and hope that it works, for the simple reason that if the Jamaican economy is to emerge from its near-slumber, it cannot be business as usual. Moreover, if 15 per cent of the target is achieved, that would still be laudable given the enormity of the challenge. It is about time we begin that voyage towards the point where the policymakers will be convinced to take Laffer seriously and offer Jamaicans a lower tax rate.
Cedric Wilson is an economics
consultant who specialises in market
regulations. Send your comments to: conoswil@hotmail.com
