THE decision taken last week to revise tax measures announced in Parliament five days previously sees the Government for all intents and purposes placing the burden of closing the deficit gap squarely on the shoulders of the middle and professional classes. This in effect means that the productive middle classes have been labouring under a misapprehension that this administration would have their best interests at heart. That one could enjoy the fruits of one’s labour and that being productive and professional in Jamaica could indeed be a rewarding endeavour will no longer be the case… at least for next year. Instead it may well behove one to languish in subsistence and seek solace in items that do not attract GCT.

The tax package announced in Parliament on December 17, 2009 has generally been regarded as ill-conceived, placing an unbearable strain on low-wage earners and those deemed the poorest among us. The protests and howls of discontent at the Government’s insensitivity in placing GCT on basic food staples and its attempt to widen the tax net forced the Government to make a volte-face which is equally ill-conceived.

Yes, the Government has earned a temporary respite and there is little chance of the masses taking to the streets, but it may have gone from one extreme to the other and in effect alienated itself from its core support base, not to mention fostered resentment from the most productive in Jamaican society.

Putting in place a wealth creation culture

A burgeoning and content professional middle class is a barometer of the success of an economy. One only has to look to emerging economies like India, China and Brazil. Wallowing in an income per capita band of less than US$5,000 will not and cannot generate adequate taxes. Jamaica has to rally around a culture of wealth creation, not subsistence. It is growth and production that will help the country climb out of the hole it finds itself in.

Addressing the nation on December 23, 2009, Prime Minister Bruce Golding set the stage for the rationale behind switching the burden onto the middle classes: “One of the concerns that has been expressed is the need to share the burden of the new taxes more equitably. To him that more is given, more must be expected. This is a sound argument.”

But that is not the argument this administration presented to the electorate back in 2007. It projected itself as one that had the professional classes’ interests at heart and

that productivity and ingenuity would be rewarded. The professional classes must now see this as a reversal of fortune.

“To him that more is given, more must be expected,” is an aphorism that has some resonance in these difficult times and indeed those who have more should be expected to give. But the question, is how much and what does one get in return? Christianity is still the first call of faith in this country and many look to their Bible for guidance. As far as rewarding productivity and creating wealth is concerned, perhaps Bruce Golding could look to Galatians 6:7: “Be not deceived, for whatever a man soweth, that shall he also reap.”

Or perhaps Proverbs 10:4: “Poor is he who works with a negligent hand but the hand of the diligent makes rich.”

Then again there is Corinthians 16:2: “On the first day of every week each one of you is to put aside and save as he may prosper, so that no collections be made when I come.”

A country of austerity

Golding went on to announce that the personal income tax rate will be increased to 27.5 per cent on all income above the threshold for persons earning in excess of J$5 million and 35 per cent for persons earning in excess of J$10 million. This only serves to atrophy productivity which in the end stifles growth. Why? Because there is no reward for one’s labours. With inflation at double digits, a depreciating currency that may well come in at over J$100 to US$1 next year, the most productive people in the society will experience diminishing returns. Then there is the additional tax burden on luxury items which only serves to make Jamaica a country of austerity and frightens the middle classes away — the very people you want to help you grow your way out of your predicament.

It may well have been better to place a greater emphasis on boosting consumption and then taxing it reasonably, say GCT at 15 per cent with certain exemptions. In effect, in one fell swoop you widen the tax net, garner revenues and encourage prosperity and wealth.

Attracting the brightest and best

It has been reported that the former deputy chairman of the ATL Group, Christopher Zacca, has gone into national service as an advisor to the present administration. For his efforts he will earn a paltry fee of just J$5 million. Many people have lauded his sacrifice but it must also be noted that the Government is getting one of its brightest sons, both an MIT and MBA graduate who has served many years as a senior executive at some of the country’s top corporations on the cheap. If he were to operate in first-world economies he might well earn ten times that J$5 million. Top talent should be justly rewarded. It is not good enough to meekly declare, “Well, we can’t pay private sector salaries or we just don’t have the resources,” and expect to attract the brightest and best. All one does then is have the pick of mediocrity and the dregs of the barrel.

Thriving economies aim to have its citizens aspire to a good living where their efforts are rewarded. Looking to parity does not inspire greatness or wealth. It is not a boon to productivity. The country’s finest and brightest should be rewarded and serve as an example to others. How can a man like Zacca or any similar qualified executive be earning the equivalent of a graduate professional a couple of years out of college and then be expected to cough up a third of his earnings in taxes?

This can only lead to a brain drain at a time when you need your best professionals the most.

Golding should guard against appeasing the poor only to scare away the professional classes or have them resentful and conjuring up ways to avoid paying taxes. Jamaica cannot be a country where it does not pay to be professional and productive. Yes, the $21.8-billion gap has to be filed and the Government finds itself in a hole largely due to a combination of the global recession and poor fiscal management. The revenue shortfall must be made up and the nation must grasp the importance of tax collection.

Greater compliance

Back in May, 2004 Deika Morrison, then minister of state in the Ministry

of Finance, addressing a one-day exposition at the Management Institute for National Development (MIND) said: “Economic survival and prosperity hinges upon the strength of a taxpaying culture and tax morale. We must make that critical link between tax revenues and economic independence. If we, by abdicating our responsibility to pay our taxes, do not provide the revenues for services for the public good, then who do we really expect to pay for them?”

Quite right. A nation’s citizens should pay taxes in an equitable manner and there should be a healthy degree of compliance. It is simply not good enough to hold the notion that people do not comply so the easier way is to put the burden on PAYE employees. The Government has to ensure … now more than ever… that the compliance rate is increased. It is a sad state of affairs when only 4,000 people besides those who come under PAYE are paying their dues. Many businesses and business leaders who ought to know better do not pay their taxes as they ought to, thus placing undue stress on the Government.

The administration should not be fearful of pursuing these miscreants and making examples of them. All too often administrations are beholden to them and let them off the hook, yet look to the law-abiding citizens to foot the bill. This is unjust and wrong. It is estimated that the Government could reap an additional $11 billion — half of the deficit — if it could raise the compliance rate. As it stands now the $21.8 billion that the Government is after represents around two per cent of GDP. It is therefore clear that the Golding administration has to put a much greater emphasis on compliance and productivity. The question that should be occupying its mind is how do we grow this economy? The answer is not taxing the professional classes and prohibiting luxury goods.

Burdening the middle class

It is an interesting exercise to compare Golding’s approach with that of a campaigning Barack Obama.

Back in 2008, Obama declared: “I can make a firm pledge. Under my plan, no family making less than US$250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.” Though that may be difficult to honour given the state of the US economy and attempts to bolster welfare and health services, he grasped immediately the importance of not making the middle classes a beast of burden.

Obama is finding it difficult to keep his promises. He promised job creation. He promised unemployment would not rise above eight per cent if Congress passed the US$ trillion “stimulus” package, but unemployment now stands at 11 per cent nationally. Obama is now pushing ahead with a new national energy tax, known as “cap-and-trade” which will raise taxes on the middle class and small businesses.

Golding promised jobs, jobs, jobs and a new middle class that would be set on the road to prosperity in a country which would enjoy better public services. Over the last two years the country’s debt burden has gone up 30 per cent and 40,000 jobs have been lost, not to mention the Jamaican dollar has devalued considerably and the country has had to go cap in hand to the IMF. These signs presage a fate suffered by Jimmy Carter — a one-term presidency marked with few accomplishments. Still, there is time for both men to turn things around if good governance and prudence is allowed to prevail. Fortune favours the bold. President Reagan once quipped that the Democrats governing mantra is: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it!”

This administration should take heed and avoid the fate of those who go this way. It is a recipe for low productivity and stagnation. Air Jamaica and the sugar industry already qualify as forewarnings.

Can taxpayers expect better services?

Jason Morris of JMMB raises a very important question. Given the new measures and the Government’s intent to close the gap, is the fiscal deficit target still set at 8.7 per cent of GDP? Neither the prime minister nor the minister of finance has indicated whether this is still so. Even more worrying is that following the announcement that the middle classes now have to bear the brunt of the tax package, we don’t know whether the Government will be offering better services. Can taxpayers expect better roads, better street lighting, better schools and medical care, or will it simply be a case of raid the middle classes and give nothing in return?

Golding’s address made no mention of a reciprocal deal; instead he made it clear that: “The tax package announced last Thursday was designed to raise $21.8 billion. That is the amount required to satisfy the Medium Term Economic Programme we have submitted to the IMF. Without that additional revenue, there will be no IMF programme. I want you to understand what this will mean. Without the money from the IMF, the exchange rate would come under severe pressure because with the fallout in bauxite and alumina earnings, remittances and other inflows, we would have difficulty in meeting the demand for foreign exchange. “Without an IMF agreement, the additional funds from the World Bank and the Inter-American Development Bank which we need to support the budget would not be forthcoming. We have to find this $21.8 billion of additional revenue. This is the stark reality.”

For a start there is no guarantee that the other multilaterals will come on board to the degree that the Golding administrations needs them to, once the IMF agrees to disburse funds. The country cannot count on it, and suitable alternatives, a Plan B of sorts, will have to be sought. Saddled with this onerous tax, nowhere does the Government make the attempt to map revenue with expenditure so that the public will be able to see exactly how their tax dollars have been spent. There is very little explanation of what people’s revenues will provide for them. The Government has not entered into a social contract with the citizens.

Yes, the poor will always be with us and they cannot bear the burden. But what does one get for their taxes? Other societies provide a welfare state, free health care, free education, good roads; what can Jamaicans count on? How will their tax dollars help to make a better Jamaica? It’s all very well sacrificing, but the question is to what end? Can the country expect even more decrepit public services for its ever-increasing tax dollars and how much more of this can the middle class take? Can the Government honestly say that Jamaica is a country worth living in, where by the sweat of one’s brow and with a commendable work ethic one can prosper and provide adequately for one’s family as a law-abiding citizen? Or do we have to acknowledge that we reside in a crime-riddled, low-earning state bereft of adequate public amenities and services which vies with Haiti for the unbecoming title of the sick man of the Caribbean?

If the Government as promised removes this tax package on the higher-earning professional classes in 2011 then the pain will be short-term and the Government may well win them back in time for the general election. As Minister for Industry and Commerce Karl Samuda said: “The income tax rates that will be introduced and are described as temporary, must be temporary.”

If they are not, there may well be a backlash that makes it very uncomfortable for the Government. The taxes announced are stiff enough and that is not considering education tax and all the other taxes that bite substantially into one’s take-home pay.

A progressive tax system

Jamaica favours a more progressive tax system, one set up so people with a higher disposable income must pay a larger percentage of their income in taxes than those with low to moderate earning power. In other words it is a tax imposed so that the effective tax rate increases as the amount to which the rate is applied increases. The Government regards this as fair in a country such as Jamaica where earned income is nothing to write home about. But the tax measures as they currently stand will serve to lower the overall savings rate, encourage people to move to countries with tax policies that are more favourable to the wealthy, and discourage people from working to earn higher incomes because they will be forced to pay more taxes.

It would have been better if the Government had formulated a number of tax bands, say from $5 million to $35 million, something akin to what currently prevails in the UK. In the US there are six brackets ranging from 10 per cent to 35 per cent of tax a person owes, calculated based on each dollar that falls within a particular monetary range. But to move from 27.5 per cent for those earning over $5 million to 35 per cent over $10 million displays no methodology. At this stage Jamaica is nowhere near ready to contemplate a comprehensive regressive tax system which sees the effective tax rate decreasing as the amount to which the rate is applied increases, which in Jamaica’s case would put the tax burden on the great unwashed masses. However, the Government employs a hybrid system of sorts which sees certain daily essentials consumed by poorer individuals attracting no GCT. It was the attempt to remove this that caused national outrage.

If the Government really wanted to display vision and reap more than the $1.3 billion it hopes to rake in from this new income tax measure, it would cut taxes on earned income to 20 per cent (excluding education and all the miscellaneous taxes). Then it should look to raise taxes on unearned income which in effect will make up the difference lost to income tax. Huge benefits from cutting evasion, avoidance and deadweight costs of collection could then be shared out equitably.

By taxing unearned income, for example a land value tax, it would shift the tax burden away from shops’ earned income onto their landlords’ unearned income. Does the Government really think that those earning over $10 million a year will just sit there and go “OK, it’s for the greater good because you say so, so take yet more of my income?” Will they just sit and take it or will they:

* decrease economic activity

* increase the use of tax avoidance and evasion measures

* move to work and invest in more favourable tax regimes.