Tax Reform to Stimulate Economic Activity

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. 

By Allan Brooks, JIS Senior Reporter