New Taxes vs. Increased Tax Compliance

by David Mullings

The Prime Minister recently announced, during an interview, that new
taxes would have to come on stream. This will happen almost immediately upon the signing of an agreement with the IMF and before the end of the fiscal year in order to close the J$10 billion gap between revenue and expenditure.

All economists agree that raising taxes during a downturn is usually
more harmful than beneficial. I dare say that increasing taxes at this
time also increases the tendency of people to attempt to avoid paying
taxes at all. Jamaica has a GCT and raising that from 16.5% is clearly
on the table. There are already ways to avoid GCT and I believe that
increasing this tax, while it does theoretically widen the tax net
because it is a direct tax, will lead to even more avoidance unless
measures are put in place to ease the tax burden on PAYE individuals.

Here are the unnerving facts:

(1) Most of the personal income taxes is already paid by the 350,000
PAYE individuals who fall within the net (it is estimated that 120,000
employed people fall outside the PAYE net).

(2) The income tax threshold will move to J$440,000 on January 1, 2010
from J$220,000 in early 2009. This results in 132,000 PAYE workers no
longer paying tax and was done because of the new special consumption
tax on fuel and taxes on emoluments introduced this year along with
other new or increased taxes.

(3) Only 4,000 people other than PAYE workers pay income tax in Jamaica.

(4) 1% of registered businesses account for 60% of the PAYE
contributions according to a 2007 Inter-American Development Bank
(IDB) study.

(5) The same IDB study estimated that only 71% of the corporate income
taxes paid in Jamaica were paid by only 1% of companies.

(6) The IDB also estimates that 40% of the economic activity in
Jamaica is untaxed.

(7) The Prime Minister in the past pointed out that of 500 medical
doctors identified at random from domestic directories, a mere handful
was on the tax roll and filed returns.

On June 11, 2009, Senator Arthur Williams, Minister of State in the
Ministry of Finance and Public Service spoke about comprehensive tax
reform being worked on while addressing the graduation exercise of the
Tax Audit and Revenue Administration Post Graduate Diploma Programme.
He said that the “tax regime is burdensome, complex and inequitable”
and that “A more simplified system will encourage local investment and
formal business activity, while also making Jamaica a more attractive
destination for foreign direct investments. Voluntary tax compliance
will improve, because it would be easier to pay one’s taxes,”

If the Prime Minister does in fact prefer to introduce new taxes while
raising others instead of taking this opportunity to introduce this
much talked about “simplified system” then it will be one of the
greatest missed opportunities since 1962.

PAYE workers cannot afford any more taxes and they will definitely
find a way to avoid the new taxes as best as possible. My next post
will deal with the proposed cuts to the public sector and a
counter-proposal.