Robert Buddan, Contributor
It was popular to talk about a fiscal crisis in the developed countries in the 1970s, one that led to welfare and tax reforms in the 1980s. The crisis was usually explained by a world crisis, such as the oil price increases of 1973/74, or inefficient welfare spending by states causing tax revolts by the overburdened middle class.
In Jamaica's case, one can add the revenue crisis, which we have had for the past 30 years, although the roots of it go back long before.
The fiscal crisis is one where a gap exists between revenues and expenditure because of ingrained patterns of behaviour that result either in revenue deficits or unrealistic expenditure. Over time this leads to other crises, such as legitimacy, credibility, security, and welfare undermining faith in government and the political system.
This problem is deep-seated in Jamaica. Alexander Bustamante once said that colonial governors judged their success by the extent to which they could leave a higher surplus than their predecessors did, even with poverty around them. British colonialism tried to minimise its costs and governors were given incentives of royal patronage (MBEs, knighthoods, or governorships of prized colonies) to do so.
Tax assessment purposes
The same Bustamante spoke of another source of this crisis. Large landowners undervalued their land for tax assessment purposes. Busta proposed to use their land valuations to cost their land and for government to buy that land and redistribute it to small people in land settlement schemes. There was a history of government being unwilling to spend and property owners being unwilling to pay.
Revenues from new investments after 1950 eased the situation. But the problem still existed. Despite efforts to reform tax laws the tax system is still plagued by avoidance and evasion. Many still believe the problem is about the equity and efficiency of the taxation system. They might be missing something else, the culture of non-compliance, the same thing that causes people to commit crimes, evade fees and fines, encouraged by the failure to enforce the law and punish wrong doing. Just as the criminal justice system has a low arrest and conviction rate, which allows people to treat the criminal law with impunity, tax evasion and non-compliance have become commonplace because we do not make the laws effective.
The current evidence
Mr Golding's budget presentation of just two weeks ago reveals more than ever the very troubling extent and nature of this crisis. Here is what he revealed:
Average customs duty collections amount to only five per cent of the value of imports. For an import-dependent society the least we should be doing is making imports pay with the hope that this will encourage local substitute production. Instead, we lose on two counts, having cheap imports that compete with local production without adding much to revenues as a form of compensation.
Only one per cent of registered companies account for 75 per cent of corporate taxes. On the other hand, 75 per cent of registered companies account for less than one per cent of corporate taxes. Some companies obviously make much more than others and so pay a proportionately higher share of corporate taxes. What these figures don't tell us is how much of the amount of company taxes that is due is paid. In a society that depends on the private sector to be the engine of growth, the state depends on it as an engine of revenue. The market will not help us if the state does not earn from it. We are not getting our due, as state and society, as the next revelation shows.
Eighty per cent of the company taxes and 50 per cent of the property taxes owing are not being collected or paid. This is a good example of how the fiscal crisis plays itself out as a political crisis.
Companies say that company taxes are too high and have been campaigning for a long time now for it to go down under the guise of tax reform. But how can their tax be a burden when they are not paying it?
The effective tax rate on these companies is therefore quite low. But companies want better security, better trained workers, better transport and road works and better public services. How are they to get it if they are not paying for it?
Property owners are another case. A survey in 2006 showed that 80 per cent of Jamaicans were not willing to pay more taxes for better local government services. They are not paying enough of their property taxes that go to local government to begin with, but again everybody wants better government services.
Here is another shocker. Mr Golding said that apart from PAYE taxpayers, only 4,000 individuals are paying income tax. It is estimated that a quarter of a million (250,000) persons who should be paying something are paying nothing. Jamaicans have given a new or not so new twist to the statement, 'no taxation without representation'. We are expected to pay taxes to our own state to represent us. But we get no representation because we pay no taxation.
The last revelation is this. For every $100 of revenue collected, $60 goes back out in the form of tax relief, waivers and concessions. So, the state that does not get its due, gives out relief to those who do not pay, and in spite of the fact that it cannot afford to do so. Some relief is obviously necessary on compassionate grounds, but only relief to the poor, elderly or disabled. Waivers from the Ministry of Finance amounted, according to Mr Golding, to $12.5 billion for 2006/7. It is much greater if you add up waivers granted by other ministries. Ministers come under a lot of pressure, he said, and a lot of waivers are sought - too many.
Mr Golding's solution appears to lie in the reasoning that if people are asked to pay less tax, more of them will pay. I am not convinced. Yet, this is the reasoning behind the tax reforms that the government will propose. It assumes that people have a sense of duty to pay taxes and would like to, but cannot either because they really cannot afford to or are involved in a justifiable tax revolt. My suspicion is that many evaders and avoiders are unconscionable cheats. There is no sense of duty and no shame in cheating the state, the society and in the long run, themselves.
Inequity, inefficiency and leaks
Mr Golding couches the problem in terms of three things - inequity, inefficiency and leaks. In these terms, the problem can be fixed to make tax laws more equitable and collection more efficient with fewer leaks. The problem is the state's problem. But it is more than that. It goes to the heart of the culture of society - lack of honesty, duty, and civic mindedness - and of the state - permissiveness, softness, and clientelism. It is these factors that are and have been behind the fiscal crisis for more than 30 years.
The result is debt, lack of credibility in government's promises, and voter disenchantment, and society and its economic players, not just politicians, are behind it.
Robert Buddan lectures in the Department of Government, UWI, Mona. Email: Robert.Buddan@uwimona.edu.jm.
