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.

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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.

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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.

 

REPLY TO DEATH OF KING SUGAR

By Damion Brown:

The emphasis on modernizing the sugar industry and redirecting it to areas where it can generate the most value added (cogeneration of fuel, ethanol, etc) has significant merits.  Greater benefit can be extracted from the expenditure in the industry, leading to greater employment, savings on foreign exchange used in importation and the spill over benefits from increased use of technology.  Other countries have shown that transformation can take place to make sugar a profitable industry, with other beneficial spin off industries.

We however miss the broader question by going straight to the restructuring of the sugar sector,…as the saying goes “ask the wrong question and I will gladly give you the wrong answer”.  The right question is….is sugar one of the best industries to invest in, given Jamaica’s current situation?. Given the high unemployment, especially of the youth, the high import content of any industry that uses lots of equipment/infrastructure (such as hotels),  the emphasis should be on industries that can still be efficient with high labour utilization, significant skills training, a relatively short time to re-skill labour (no more than 4 years) and that can earn foreign currency.  “Knowledge” industries play this role, and money should instead be spent training data analysts, computer programmers, and specialized business analysts and business process operators.  A subsidy (many different ways such as building the infrastructure, or putting DBJ money as risk investment) could be put in place to entice investors to take the cost/risk of being significant first movers in these areas, and government could have special approval gateways and investor engagement to entice investors from abroad or locally.   These industries are also capital light, so that the ability to scale their size is significant and only truly limited by the size of the trained labour force, maintaining wage competitiveness internationally,

Lets be frank, looking 10 years down the line would the countries best be spent on getting more cane cutters, tractor drivers or even lab technicians for the sugar factory? or would young people with technological skills and industries to utilize these skills create far greater benefits and be better able to adapt to the inevitable changes in the global economy?

We must be bold enough to take a fresh looks as to where tomorrows opportunities and be decisive enough to break with tradition, even at great cost (financially and emotionally). Improved investment in sugar would turn out to be “sweet”, but using those resources in other industries would be far “sweeter”.

 

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