This is the second part of a presentation delivered on behalf of the Private Sector Organisation of Jamaica at the launch of the IMF Regional Outlook which took place at the Bank of Jamaica last month.

The Matalon Report suggested that tax reform needed to be considered as a package and not simply as a menu to be cherry picked by the Government. The key suggestion was to substantially raise the threshold, and equalise corporate and personal tax rates at the lower individual level, to be financed by a one per cent rise in GCT and a tax on gas. It was thought that these measures would generate a very substantial compliance dividend, as had occurred in the 1980s.

The report was ready from October 2004, but the moment was missed when the Matalon report was essentially cherry picked for its revenue measures (raising GCT by 1.5 per cent to 16.5 per cent) in the April 2005 budget. The key reason for the cherry-picking was that the government at the time, just recovering from a fiscal crisis at least partly brought on by excessively high interest rates (this may sound familiar) felt unable to tax gas as the issue had been treated as a political football.

We are now facing a much deeper economic crisis than that of 2003. The unsurprising result is that the tax reports have again been cherry-picked for their revenue raising measures at the expense of fundamental reform.

A Blueprint for Taxation Reform in Jamaica

Notwithstanding the Prime Minister and the Minister of Finance’s clear focus on the issue of tax reform at the beginning of their term, the process has appeared stalled.

Between October 2008 and July 2009, a significant amount of work took place in a National Planning Summit Expert Committee chaired by then Minister Don Wehby. The report, “A Blueprint for Taxation Reform in Jamaica”, informed but did not decide the budget process that year. The key problem was that what was originally supposed to be a revenue neutral reform was now required to raise additional taxes of close to $20 billion, in the first instance, primarily to cover rising interest costs.

As in the Matalon report, a tax on gas was seen as a key way to finance tax reform, but was instead used to plug the gap in the 2009 budget.

The successful implementation of comprehensive tax policy reform measures requires fiscal space. It is nearly impossible to undertake significant policy reforms when new tax measures are required annually, much less when a country has three tax packages in one year, as occurred in 2009. Successful tax reform requires a fiscal cushion to help even out the winners and losers.

Jamaica needs tax reform that :

Promotes economic growth and acts as a catalyst for development

Is characterised by simplicity, equity and competitive rates

Is administered in an efficient and effective manner.

The roadmap for tax reform includes legislation, staffing and systems, and public education and monitoring.

The key is implementation. Where a specific agreed reform cannot be implemented in the short-term due to fiscal constraints, an implementation plan based upon achievement of specific metrics should be established.

Critical success factors include :

Political Will, Public/Private Sector Collaboration and consensus to move forward.

Political will is determined by the Government’s priorities, the stance of its Opposition and public perception. The private sector particularly has much to contribute to any tax reform process including a business perspective, technical expertise and resources. Last year, the PSOJ offered to pay for one or more experts to assist in the process of reform.

We all need to work together to create political space in order to facilitate tax reform implementation in the interest of the country. A successful tax reform strategy should be capable of surviving a change of Government – this can be achieved through an ongoing inclusive framework involving Government, the Opposition, the unions and the private sector. Such a framework already exists in the currently stalled partnership for transformation.

Reform of the Budget Process

It is absolutely critical that meaningful pre-budget consultation takes place with sectors likely to be affected. Every difficult budget that I can remember has involved roll backs in areas where there was a lack of consultation. In effect, the consultation took place afterwards. The recent appointment of a Commission of Inquiry hopefully means that there should be no further obstacle to true consultation through the partnership for transformation fiscal and tax committees.

Consultation is meaningless without numbers. In jargon this means accurate projections of the fiscal space. We also need to take a medium to long term view -three to five year rolling budgets which align specific revenue, expenditure and borrowing targets with medium and long-term National Development Plans.

Technical/Administrative Capacity

The implementation of comprehensive tax reform requires a very serious commitment of institutional, technical and administrative capacity.

Tax reform is key to our industrial, trade and investment promotion strategy

The massive fiscal crisis faced by the Government meant that a single low rate of corporate tax, however desirable, is not possible in the upcoming budget. The second best alternative is simply to get rid of the existing poorly targeted, arbitrary, time bound incentives (with appropriate grandfathering), and adopt a 10% rate of corporate tax for manufacturing, agriculture and international traded services (including tourism), thereby narrowing the difference between the 0% incentive rate and the standard corporate rate of 33%.

There is no other measure that would create private sector jobs quicker or faster.

The key is to put in place policies that facilitate the growth of the industries that do not yet exist. Any tax revenues generated therefore become “found money”. The goal should be not so much to pick winners, but to create an actively enabling environment for areas of obvious additional potential, such as tourism, health services, professional services, agriculture etc.

Expansion of new export industries – Health tourism

Health tourism, for example, would be regarded as a reverse export (and therefore not subject to GCT) despite the service being delivered in Jamaica, and would pay corporate tax at only 10 per cent. US hospital groups would also be able to take advantage of Jamaica’s double taxation treaties to offset this tax against their US taxation. Rather than a cash-strapped government giving the new industry additional tax incentives, the Government could give the business land in return for a quota of Jamaicans (say 20 per cent) who would receive free health services.

The Government could reform customs duties across the board to a low flat fee, say 10 per cent, that would allow the importation of the very expensive specialised equipment that such a business would require. A sufficiently big industry of this type would produce enough revenue to cover most of the health needs of the entire Jamaican population – true free health care for all. Just one hospital in Thailand generates revenues of US$600 million, and an entire health industry has grown up in nearby Mexico.

Conclusion

Once again, Jamaica faces a choice. Without a shift to export led growth, our current best case scenario is that the IMF allows us to regain enough macroeconomic stability to muddle (rather than stagger) through as we have in past.

The danger is that our economy continues to sink, creating the environment for social unrest, a renewed flight of the middle classes and professionals, and an increased criminalisation of the economy due to the shrinking of legitimate opportunities.

Alternatively, we can make a new, determined, united effort, putting as far as we can party aside, to move our country forward.

The key question is will we use the fiscal breathing room from the Jamaica Debt Exchange for a comprehensive tax reform this fiscal year. This would be a gift that keeps on giving, rather than a brief respite in an ongoing fiscal crisis.

If we can only do the latter, then the historians of the future will not have to describe the second decade of this century as just another decade in our long decline, politically, socially, and economically, but as the beginning of a new and glorious renaissance for Jamaica.