JIS News

For decades, tax reform has been a sought-after strategy to enhance economic growth. In fact, it is a major plank in the Government’s thrust to maintain macro-economic stability, namely low inflation, a stable exchange rate, and competitive interest rates.
Tax reform is said to be the process of changing the way taxes are collected and managed by Government, both in terms of policy and administration. The reason for the popularity of tax reform is that if done effectively, it will bring in much needed additional tax revenue.
In a recent interview with JIS News, Deputy Financial Secretary in the Taxation Division of the Ministry of Finance and the Public Service, Paul Lai agrees that tax reform is a formidable strategy, which is heavily influenced by the efficiency, simplicity and fairness of the tax system.
“This strategy would go a far way in getting the tax-paying public to become more compliant and ultimately, generate the anticipated increases in revenue,” Mr. Lai assures, adding, “And there lies the challenge for tax reform”.
Noting that the Jamaican economy has been undergoing tax reform for decades, he says it is nevertheless still needed for several reasons.
“The tax system is often perceived as being unfair and because there is a high debt to GDP (Gross Domestic Product) ratio of 126.1 per cent, more revenue is urgently needed to close the fiscal gap. Also, we have low (annual real) GDP growth rates despite high levels of foreign direct investments,” Mr. Lai argues.
He also points out that Jamaica does not have a uniformed tax rate structure and that there are separate agencies administering different taxes. “This complicated and inefficient system has contributed to the generally low compliance level and there is arguably a ‘tax me if you can mentality’ which contributes to a sizeable informal sector,” the tax expert states.
“Another reason why we need to reform the tax system,” Mr. Lai says, “is because only a few taxpayers bear the burden of various taxes. For example, only a few firms pay the majority of the tax revenues yielded from some major tax types, such as GCT (General Consumption Tax) and CIT (Corporate Income Tax) and this situation is unfair”.
A comprehensive tax reform based on simplicity, efficiency, fairness, along with improved tax administration he argues further, will go a far way towards increasing compliance and ultimately reducing the burden on compliant taxpayers. He also contends that based on studies conducted and comparisons made with other developing countries, there is too high a dependence on direct taxes, for example, PAYE, National Housing Trust (NHT), and education tax.
Mr. Lai also believes that the tax system is ad hoc due to the granting of special treatments, which are based on discretion rather than an objective/rules-based system, claiming that “there is differential treatment for certain taxpayers, etc”. He points out for example, that “the tax base is too narrow, partly because of exemptions, zero-rating, and the granting of various incentives, etc”.
Ideally, Mr Lai says, a tax system should have at least three main attributes: equity, efficiency and simplicity. “What I mean by equity is that taxes must be raised in a way that treats individuals fairly. Efficiency speaks to a system that minimises interference in economic decisions, and by simplicity I mean a tax system that is not burdensome on taxpayers or tax administrators,” he explains.
For the way forward, there are many things that can be considered, he says, including greater reliance on indirect taxes rather than income-based direct taxes, since indirect taxes are more conducive to economic growth. “We could also simplify the tax system by reducing exemptions and consolidating payroll taxes to reduce duplication, lower the compliance costs to taxpayers and reduce the onerous requirements for compliant taxpayers,” Mr. Lai suggests.
According to him, the tax rates also need to be lowered where possible and the tax base broadened further to create a more investment-friendly climate and to boost tax compliance.
“We also have to reduce the number of non-standard tax rates for a particular tax types, for example, GCT. The tax rates must be harmonized where possible, including CIT rates, to reduce ‘income shifting’ and to mitigate against international tax competition and increased capital mobility. And last but not least, we should also consider further rationalization of the existing incentives regime,” Mr. Lai suggests further.
As to why tax reform has not been more successful so far, Mr. Lai tells JIS News this is partly because there are hindrances. Citing budgetary implications, he says these will vary depending on the type of tax reform being implemented suggesting, for example, that a phased reform would likely imply that only the mix of options that will yield more revenue would be chosen.
“There are also political considerations as some reform options could lead to political fallout for government. Also, it must be taken into account that reform will create ‘winners’ and ‘losers’ and the losers might not necessarily welcome such reforms. And lastly, there is the CARICOM Common External Tariff (CET), which might make it difficult to actually address the variable tax rate structure, for example, tariff rates,” Mr. Lai notes.
Overall, he says, “in line with global trends, tax reform in Jamaica is likely at some point to place more emphasis on indirect forms of taxation.
Therefore, we are likely to see a reduction in direct taxes rates, for example, corporate income tax, transfer tax and stamp duty. And let’s not forget this: despite the challenges, we need to simplify the tax system, make it more user-friendly to taxpayers, less distortionary and more progressive”.
This he says, means that “it is more desirable to have taxes, which increase with the taxpayer’s ability to pay, for example GCT, bearing in mind that Jamaica’s tax system overall is mildly progressive”. He says from this, it can be deduced that “regressive taxes, whereby people with more income pay a smaller percentage in taxes, such as the SCT (Special Consumption Tax) and proportional taxes, whereby households pay the same share of income in taxes regardless of their ability to pay, would not make the tax system fair.
He says therefore, that “we urgently need a tax system that is equitable, whereby each taxpayer contributes his or her fair share of the cost to government. I say so in terms of both horizontal equity, whereby taxpayers with the same income bear the same burden regardless of the source or sources of income and vertical equity, whereby those taxpayers with more income pay proportionately more tax on that income”.
Mr. Lai concludes that overall, effective tax reform, which will make the Jamaican tax system simpler, fairer and enhance economic growth, would definitely redound to the benefit of all.