Within the next decade “technological change will revolutionize the energy sector, undermining current assumptions and conventional wisdom”. Simply put, customers will have an economically viable choice to leave the grid. This will mean utility-controlled fossil fuels will no longer be the de facto power source for electricity generation.
Two of the key questions thus facing Caribbean policy makers are:
1. To what extent should they diversify?
2. At what point should they jump onto the renewable energy bandwagon?
Economic Growth
Politicos must bravely go where all experts have recommended before
The objectives of tax reform in Jamaica should be:
1. Economic growth: to promote a rise in the standard of living for all.
2. Revenue: to raise additional revenue towards balancing the fiscal budget.
3. Efficiency: to be able to collect taxes due without spending too large a share of that revenue to ensure compliance.
4. Equity: to spread the burden of taxation such that those persons of equal means pay an equal share and those of unequal means pay appropriately unequal shares.
In order to make progress towards those four objectives, Jamaica's tax code needs to be reformed drastically.
This has been the conclusion of the reports of the Matalon Committee on Tax Reform (2005), Tax Reform and Economic Development by Roy Bahl and Sally Wallace (2007), and the Blueprint for Tax Reform (2009).
A review of the findings and recommendations of these studies suggest that, in order to meet the objectives outlined above, the following three priority areas are the most critical elements required for a tax-reform programme for Jamaica.
First, simplify the tax structure and facilitate compliance. This priority could be met by, amongst other initiatives:
reducing the number of tax rates for similar activities and reducing the number of exceptions to those rates;
rewarding historically compliant taxpayers with extended validity of their tax compliance certificates (TCCs); and
implementing a unified tax return for all types of taxes; and by permitting the filing of a consolidated GCT return by a group of companies.
The second priority area is to shift from direct taxes on income to indirect taxes on consumption and production.
Income taxes are the most iniquitous type of taxation because they are the easiest to evade and, therefore, the most costly to enforce.
CaPRI's brief, Tax Reform for Growth - of which this is article is a summary - recommended that income tax reduction be effected by lowering the rate of corporate income tax and by raising the threshold of the personal income tax while holding that rate unchanged, so that more persons at the lower-income brackets would pay no income tax at all.
The lost revenue could be replaced by extending the coverage of the GCT to items that currently do not attract GCT.
These measures will collectively shift the burden of taxation from income to indirect taxation.
Since the practice of exempting certain entities facilitates evasion beyond the legal privilege accorded by the exempt status, GCT exemptions should be revoked and the revenue earned earmarked for transfers to the same formerly exempt entities, so that they are no worse off. This would include the Government.
Higher levels of social protection would be a necessary condition for shifting from reliance on direct to indirect taxes.
But the current structure, under which the benefits of tax exemptions are poorly targeted and exploited, is ineffective as a means of poverty mitigation, as well as wasteful of public resources.
Social protection ought to be pursued through the spending side of the budget via the PATH programme, public health, public education, and so on.
This would allow social protection to be targeted to those who actually need it and, through the additional revenue collected, make it possible for a larger proportion of needy citizens to receive higher levels of social protection than currently obtains.
The third priority area for achieving progress towards the goals of an effective tax code is the area of tax concessions, the proliferation of which needs to be tamed and the amount drastically reduced.
The myriad of tax concessions, including both discretionary tax waivers and legislated tax incentives, forego revenue, distort investment, undermine the integrity of the tax system, and have proven to be manifestly ineffective at promoting economic growth. In some cases, tax concessions are being used to meet social objectives rather than economic ones. However, where social objectives need to be met, this should be done by means other than discretion, so as to maximise transparency and minimise opportunities for corruption.
The collection of incentive legislation should be reviewed and rationalised and the power of the responsible minister to waive tax obligations should be eliminated.
Further, any new tax concessions should be tabled each year as part of a tax expenditure budget the same way that explicit expenditures are currently tabled, so that they may be scrutinised and debated.
GCT exceptions and tax incentives account for the equivalent of approximately 10 per cent of GDP in lost revenue, which implies that the budget deficit could be eliminated with the elimination of half of the current concessions without any expenditure reduction or raising of tax rates.
How well does the Green Paper on Tax Reform satisfy the objectives and priorities for tax reform in Jamaica?
The Green Paper is broadly consistent with the priorities for tax reform articulated above, especially with respect to the first two priorities, namely: simplifying the tax system and decreasing the reliance on direct taxes.
Notwithstanding that broad consistency, some straightforward steps to achieving the first priority have been overlooked, such as, extending the validity period of the TCC for historically compliant taxpayers and allowing consolidated filing for company groups.
In terms of decreasing the present reliance on direct taxes, the Green Paper does suggest a reduction in corporate income tax rates and a raising of the personal income tax threshold.
However, the proposal in the Green Paper to also reduce the rate of GCT implies that a further reduction in reliance on income taxes could be effected by foregoing the rate reduction.
This would result in a stronger shift from the easily evaded income tax to the harder-to-evade GCT.
A weakness of the reform programme outlined in the Green Paper is a failure to articulate a more measurable commitment to the reduction of tax waivers and tax incentives.
The proposals stop short of accepting the Inter-American Development Bank proposal to eliminate discretionary waivers and, instead, states an intention to "significantly reduce" them.
Mere reduction is insufficient, since it is the fact of discretion that undermines the integrity of the system of taxation, and also serves as a channel for an ever-expanding demand for waivers.
The elimination of discretionary, but not statutory, waivers alone would raise revenue by two per cent of GDP, which would be sufficient revenue to afford both a reduction of the corporate income tax rate from 33.33 per cent to 25 per cent and a doubling of the personal income tax threshold.
Tax reform in Jamaica is urgent and consequential. To achieve simplification and compliance, more can be done than has been outlined in the Green Paper.
To make headway with tax concessions, the Government needs to be more ambitious and more committed.
The Green Paper is, nonetheless, a bold step towards reform in both its substance and as an exercise in better governance.
Dr Damien King is Executive Director and Anika Kiddoe is Research Officer of the Caribbean Policy Research Institute.
By Allan Brooks, JIS Senior Reporter
KINGSTON — The main objective of tax reform in Jamaica should be to stimulate economic activity, to achieve economic growth.
The proposition was offered by the Caribbean Policy Research Institute (CaPRI), in its presentation to the third hearing of the Committee on Tax Measures for the 2011/12 session of Parliament, on Wednesday, November 16.
The Institute's Research Officer, Anika Kiddoe, in a comprehensive presentation, supported by Director of CaPRI, Dr. Damien King, posited the view that maximizing the effectiveness of tax reform efforts "requires clear priorities," given the stagnation of the economy and the negative implications of that environment for sustainable revenue generation.
"Having examined the findings and recommendations of the most recent comprehensive reviews of the Jamaican tax system, CaPRI has concluded that the top three priorities for growth-focused tax reform in Jamaica should be to simplify the tax system, decrease reliance on direct taxes and eliminate the inefficient and ineffective use of tax concessions," Ms. Kiddoe said.
She observed that the Green Paper on Tax Reform was consistent with proposals to simplify the system and reduce reliance on direct taxes. However, she argued that, notwithstanding the broad consistency, some straightforward steps to simplifying the tax system have been overlooked, such as extending the period of validity of Tax Compliance Certificates for taxpayers with a history of compliance and permitting groups of companies to form "GCT Groups" that could file a single consolidated return.
She underscored the point with the suggestion that, since GCT applies only to value added, implementation of this proposal would entail no loss of revenue for Government.
While acknowledging that the Green Paper proposes a reduction in income tax rates and a raising of the personal income tax threshold, she maintains that the proposal to reduce the rate of GCT, implies that a further reduction in reliance on income tax could be effected by forgoing the GCT reduction.
She argued that this would effect a stronger shift from easily-evaded income tax, to the harder-to-evade GCT.
"A weakness of the reform programme outlined in the Green Paper, is the failure to articulate a more measurable commitment to the reduction of tax waivers and tax incentives," she said.
Ms. Kiddoe is of the view that the proposals stopped short of accepting the IDB proposal to get rid of discretionary waivers, and instead states an intention to “significantly” reduce them.
"This cannot be reconciled with CaPRI's conclusion, that eliminating the inefficient use of tax concessions should be the firstpriority of growth-focused tax reform," she commented.
Ms. Kiddoe stated that it was of fundamental importance that policymakers accept that whenever concessions are used to provide an incentive for targeted recipients, they are simultaneously providing a disincentive for the rest of the economy, by necessitating higher overall tax rates and by encouraging the exploitation of the tax code in making investment decisions.
Illustrating the “quantitative importance” of making progress on tax concessions, she noted that the potential revenue gain from eliminating tax concessions is estimated to be 3.9 percent of GDP, which would boost revenue by some 15 percent.
She also noted that the elimination of discretionary waivers would raise revenue by two percent of GDP, which would be sufficient revenue to afford both a reduction of the corporate income tax rate, from 33 percent to 25 percent, and a doubling of the income tax threshold.
Ms. Kiddoe reinforced her position with the proposition that the elimination of discretionary waivers was of paramount importance, given that it was a necessary step to restoring fairness and integrity to Jamaica's tax system.
"As long as discretion is permitted in the application of taxes, taxpayers who are in equivalent circumstances won’t all be treated in the same way and some taxpayers will aim to ‘get away’ with as much as they can by soliciting discretion," Miss Kiddoe said.
"Furthermore, those who are not benefitting from the discretion will be less inclined to comply, not only because of the sense of unfairness but also, in the case of businesses, because complying will diminish their capacity to compete with others who are benefitting from the discretion. From every angle, discretion encourages a culture of non-compliance," she stated.
Saying the main objective of tax reform in Jamaica should be to stimulate economic activity, a local think tank is arguing for group companies to file consolidated GCT returns and that waivers be eliminated.
Caribbean Policy Research Institute (CaPRI) research officer Anika Kiddoe said maximising the effectiveness of tax-reform efforts "requires clear priorities", given the stagnation of the economy and the negative implications of that environment for sustainable revenue generation.
"Having examined the findings and recommendations of the most recent comprehensive reviews of the Jamaican tax system, CaPRI has concluded that the top three priorities for growth-focused tax reform in Jamaica should be to simplify the tax system, decrease reliance on direct taxes and eliminate the inefficient and ineffective use of tax concessions," Kiddoe said in a presentation to the Parliamentary Tax Reform Committee chaired by Finance Minister Audley Shaw.
In a presentation supported by CaPRI director Dr Damien King, the researcher said the Green Paper on tax reform was consistent with proposals to simplify the system and reduce reliance on direct taxes. However, she argued that, notwithstanding the broad consistency, some straightforward steps to simplifying the tax system have been overlooked, such as extending the period of validity of Tax Compliance Certificates or TCCs for taxpayers with a history of compliance and permitting group companies to form "GCT groups" that could file a single consolidated return.
Kiddoe submitted that since GCT applies only to value added, implementation of this proposal would entail no loss of revenue for the Treasury.
While acknowledging that the reforms propose a reduction in income-tax rates and a raising of the personal income-tax threshold, she maintains that the proposal to reduce the rate of GCT implies that a further reduction in reliance on income tax could be effected by foregoing the GCT reduction.
She argued that this would effect a stronger shift from the easily evaded income tax to the harder-to-evade GCT.
weakness of the programme
"A weakness of the reform programme outlined in the Green Paper is the failure to articulate a more measurable commitment to the reduction of tax waivers and tax incentives," she said.
The researcher also argued in favour of an IDB proposal to get rid of discretionary waivers, and against the paper's stated intention to "significantly" reduce them.
"This cannot be reconciled with CaPRI's conclusion that eliminating the inefficient use of tax concessions should be the first priority of growth-focused tax reform," she commented.
Kiddoe said policymakers need to accept that while concessions provide an incentive for targeted recipients, they are simultaneously providing a disincentive for the rest of the economy by necessitating higher overall tax rates and encouraging the exploitation of the tax code by investors.
CaPRI has estimated the potential revenue gain from eliminating tax concessions at 3.9 per cent of GDP, which would boost revenue by some 15 per cent.
The elimination of discretionary waivers would raise revenue by 2.0 per cent of GDP, which would be sufficient revenue to afford both a reduction of the corporate income tax rate, from 33 per cent to 25 per cent, and a doubling of the income tax threshold, the researcher told the tax-reform committee.
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