Revisiting the Jamaica Labour Party(JLP’s) Tax Proposal

 

By: Theodore Mitchell

The Jamaica Labour Party (JLP) pulled off a surprising win in the recently concluded general elections in Jamaica on February 25, 2016. The JLP won by the slimmest of margins after tallying 32 seats to the People’s National Party’s (PNP) 31 seats.

The JLP made a number of election promises, but one resonated well with the voting populace more so than any other and that is to effectively allow persons earning under $1.5 million to pay no income tax. The proposed income tax schedule is summarized in Table 1.

Slide1
Table 1:Proposed Income Tax Schedule

Notably, this promise is being made as Jamaica enters the fourth and final year of a four-year Extended Fund Facility (EFF) with the International Monetary Fund (IMF). The Fund program calls for, among other things:

  1. The country running a primary balance surplus equivalent to 7.25% of GDP (revised downwards from 7.5% of GDP as at the 10th country review by the IMF);
  2. Reduction of wages and salaries to GDP from 10.2% at end-March 2015 to 9.0% by end-March 2017 (previously end-March 2016); and
  3. Reduction in the debt to GDP ratio to 96% by end-March 2020.

It is estimated that Jamaica’s debt to GDP will fall to 126% at end-March 2016 while real GDP growth is expected to accelerate to 2.5% by 2020, based on the IMF’s forecasts.

Notwithstanding improvements in the country’s macro-fiscal profile, real economic growth remains lethargic and is estimated at 0.8% in 2015, which is relatively in line with the 20-year historical average of 0.7%. This brings into sharp focus whether or not it is possible for the government to implement the promised income tax policy and achieve the remaining quantitative targets embedded in the EFF.

Quantitative Analysis of the Reduction in Income Tax

It is estimated that around 340,000 persons out of a labor force of 1.4 million pay personal income tax (PIT). As at January 1 2015, the income tax threshold was increased to $592,800.  This means that every additional dollar of income above the threshold is taxed at a rate of 25%.  The JLP’s tax proposal, in a nut shell, is to increase the threshold to $1.5 million, but the caveat is that only persons earning this amount or less will benefit from paying no tax.  Persons earning between $1.5 million and $5 million, will maintain the existing threshold of $592,800 and therefore their income after tax will remain the same.  However, persons earning above $5 million will have not benefit from any threshold and therefore will be liable to pay an additional $148,200 in PIT per annum.

The revenue implication of the tax proposal advanced by the JLP is summarized in Table 2.

Slide1
Table 2:Income tax yield from change in PIT structure

 

 

 Additionally, the following points should be noted:

  • Under this new tax structure approximately 238,000 persons (17% of the labour force) would benefit from increase in average annual (monthly) salary of $51,000 ($4,130); around 870,000 (72% of the labour force) would not benefit as their income already fall below the existing income tax threshold; and roughly 17,000 (1.2% of the labour force) would pay additional PIT of $148,200 per year or $12,350 per month.
  • The proposal as is could yield even lower revenues (than presented in Table 2) as persons with borderline income may opt for lower salaries to avoid paying higher taxes. For example, persons earning between $1.5 million and $1.65 million would take home more after tax pay if their salary is reduced to $1.49 million.
  • Given that the economy is growing at a slow pace and inflation and depreciation of the domestic currency have moderated, natural growth in tax revenue is stymied. The government would therefore have to find, at a minimum, equivalent new taxes to meet the primary balance target of 7.25% of GDP if there is no cut in expenditure.
  • The most likely sources for additional tax intake are the General Consumption Tax (GCT) and Special Consumption Tax (SCT). While both taxes are efficient to collect, they are regressive in nature as persons with lower income pay a disproportionately higher amount of their income in these taxes relative to higher income individuals.
  • Based on our estimate, PIT revenues would fall by approximately $10.0 billion (0.6% of GDP).

The central tenets of a good tax system are simplicity, ease of administration, equity (vertical and horizontal) and fairness. The proposed tax measure violates all these principles.  Thus, it should not be imposed.

There is a heightened political risk with imposing higher GCT/SCT tax rate on the public and therefore the administration may consider tinkering with the corporate income tax (CIT). However, increase in CIT could lead to reduction in investments and further impede the real GDP growth trajectory, which would see the country missing the debt target in 2020 by wide margin.

 

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33 thoughts on “Revisiting the Jamaica Labour Party(JLP’s) Tax Proposal

  1. Congrats on a very good article. I have no doubt that the proposals will be refined/modified further before being introduced.
    In my view the implications of the tax proposals have much wider impact than what is being suggested. I think it will be overall positive for the economy and will improve the lives of households in the middle class. One of the major impediments to economic growth in Jamaica has been the low level of Personal Income Tax threshold. We tend to compare other things with other countries but not this one!I wonder why not? I may add that the comparisons should be done taking various factors into account -not just the amount of the threshold.
    Sushil Jain

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    1. Well I hope it isn’t modified before putting it into place. That will cause a lot of unhappy people feeling like they were lied too just to get their vote. It usually happens like this but it shouldn’t. I hope they stay true to their word and make a lot of people happy there.

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    2. I agree that the middle class will get a bump with this program. However, should the program be this extreme? More than 70% of the people are not going to be paying income tax. It just seems risky at this time.

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    3. I appreciate you taking the time to read and respond to the post. When formulating a tax policy one should look at it holistically and not in isolation by focusing exclusively on any one tax type. After which ssessment should be done to see if said policy match-up with those things that make a tax policy good (a list is provided in the article). By no means is this tax change equitable. Plus I am 100 percent certain that additional taxes will be raised from VAT (GCT) and another consumption base tax (SCT) to make up the resultant revenue shortfall. And, no suprise here, the poor pay a higher share of their income in these taxes relative to the the guys who are getting the tax break. Recall that more than 70 percent of the labour forc, including persons unemployed and persons earning below the current income tax threshold, will not benefit, but will have to pay more in conumption base taxes. Thus, poor people will bear the burden most!

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  2. Wow I never knew that Jamaica had this tax law. No taxes under 1.5 million? That’s amazing. Although I think that number is a little high. I feel people earning 1 million dollars can afford to pay taxes. I wish the United states had this law.

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    1. It seems like a good idea now, but when things are “too good to be true” they usually are. I would hate to see something like this now, bring Jamaica down to its knees in 20 years.

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      1. So true!! There has to be a downfall to something that sounds sooo good! Guess we will wait and see right?!

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    2. Zoey, the exchange rate is US$1 to J$121.33. Should you calibrate the numbers to US-dollar then J $1.5 is a li’l over US $12,000. 😊

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  3. Are people really making this much money there? It kind of a sticky situation of those people right at the edge of the 1.5 million. I would be doing whatever possible to get the amount not to pay taxes. But how could their goverment do this? How are they benefiting from it. I don’t understand it.

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    1. It seems weird at first, but I am guessing that you are giving the break to those that spend the most money in the economy with hopes they will spend and invest more of their money in the development of Jamaica in the long run? Let me know if I am off base here.

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      1. I think you hot it on the head!! I was wondering why they would do this. They are the ones that spend the most and if they are not paying taxes they will spend even more!

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      2. Jamaica has a very high import footprint. In the short-run a tax break of any kind could lead to increase imports, higher demand for foreign currency, and accelerated depreciation of the J-dollar. Thus persons, companies and the gov’t who have debt obligations in US-dollar would be worse off. Plus the – dollar price of all imports, including essential items, would increse.

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  4. If this goes into place as they say it will, I hope it works out. If it does it might mean that eventually the United States might do it as well. I have always been told that the IRS is unconstitutional and it needs to go away. Maybe this is the first step to getting rid of it.

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  5. If this goes into place as they say it will, I hope it works out. If it does it might mean that eventually the United States might do it as well. I have always been told that the IRS is unconstitutional and it needs to go away. Maybe this is the first step to getting rid of it.

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  6. Why do I get the feeling that less than $1.5 million would cover A LOT of people. The tax system would be great if you are not making any money, but for those that are making a lot, that tax seems quite high, don’t you think?

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  7. I guess when you think about that extra $12,000 per month, it might seem like a lot to the folks that are not making that much, but when you are pulling in $5 million plus, that’s not a big deal to them, right?

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  8. In this case, and it might not be the right way to look at it, I would be trying very hard to keep my salary below that $1.5 million range.

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  9. That seems like a lot of people making almost $1 million annually, right? More than 70% of the population will not have to worry about taxes?

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  10. Well, if fairness is part of a good economy and this was voted into law, then I feel that the right people thought it was fair.

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    1. Twenty percent of the voting populace voted for the ruling party. Does this signal that the majority of people on the island are in favour of the tax proposal? I hazzard a quess that they are not.

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  11. These are all things that are so hard to figure out exactly. One impacts the other and when you go to focus on just one of the elements to the puzzle, the other is thrown way out of whack. As a politician I guess it would be your job to decide which risks you want to take.

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  12. I am just trying to get my head around the numbers here. It seems that everyone is making a boat load of money and if you are under the $1.5 million, you are not paying any income taxes, is that right? Not that I have any issue with it, I just feel like I am reading something incorrectly.

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  13. I can see how a loss of that much incoming tax might be a burden on an economy. The program seems like a nice little package on the outside, but has anyone thought about the repercussions that might come from this 5 or 10 years down the road?

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  14. I think this right here:
    “The most likely sources for additional tax intake are the General Consumption Tax (GCT) and Special Consumption Tax (SCT). While both taxes are efficient to collect, they are regressive in nature as persons with lower income pay a disproportionately higher amount of their income in these taxes relative to higher income individuals.”

    Is the best point that you can make in this article.

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  15. I am all for looking forward, even if I am not included in the equation. If the debt target is missed by 2020, what will that mean for the economy and how long would it take to recover?

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    1. Good question Karen. At present the GOJ pays a risk premium of around 4.0% – 5.0% on debt issued on the international capital market relative to US Treasuries of similar tenor. The premium varies with the market’s perception of the sovereign defaulting on its obligation, which is often communicated through the rating agencies and the IMF/World Bank. Should Jamaica maintains a high debt level, which is a drag on the economy, the sovereign’s credit ratings could be downgraded. This would mean higher cost to the GOJ and domestic companies on monies borrowed externally. All things being equal, it could lead to a vicious cycle of debt accumulation for Jamaica as the country cannot fund it’s budgetary needs exclusively from tax intake and domestic capital market debt issuances. Therefore it is very important that the GOJ maintains fiscal discipline and lower the debt to help reduce the cost of funding in the future, which will help to feinforce a virtuous cycle of lowering of the fiscal deficit and the debt trajectory.

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  16. It would be awesome to have a tax law like this in the United States, don’t you think? The amount of people that are making less than $1.5 million per year is astounding and having to pay zero income tax would make their lives easier in some cases.

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  17. This is a very good article. You really break everything down so that we can all learn from it easily. I did not realize that Jamaica had the amount of GDP that you mention here. That really changes things up for an economy and it looks like they would like the “less fortunate” to benefit from it. Nothing wrong with that!

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  18. Even though the campaign promises were made, only winning the election by 1 seat doesn’t really look to me like the public is buying it.

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  19. Winning an election by that slim amount is really nothing major. The public seems to still be a little weary of the promises that the Labour Party is making and that is within good reason.

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  20. Boy, that 2020 promise could be a disaster to meet should something really backfire here. The program seems like a great idea, for sure, but the long term impact might not be something that anyone sees right now. Very risky in my opinion.

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  21. Very good article! The breakdown makes sense as well as the concerns over that debt target for 2020. This will be a very interesting one to keep an eye on.

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