Tax Reform – Personal Income Taxes Part 2

Today we ask the questions about why certain options were not considered in the green paper on tax reform in Jamaica.

The first issue that arises surrounds the use of personal allowances.  This is not a new idea and used to be a part of our tax system but was sacrificed in the name of making the tax system simpler for Jamaicans.  However, with the enforced requirement of tax filing personal allowances could be reconsidered.  They could be used up front as is currently done for pensioners or they could be claimed only by filing a tax return.  If the second method is used it could encourage persons to file a return in order to get a tax refund.  Personal allowances have the advantage of being used to target a certain sector of society rather than giving the benefit to all.  In addition one can fix the amount of the deduction and thus limit the total relief that is being given.

For example health insurance could be allowed as a deduction from your tax computation with the idea being to encourage more persons to use it.  This idea is already in use with respect to pension deductions.  The aim is to encourage persons to protect themselves against unforeseen circumstances in order to relieve the Jamaican government from providing that service. 

Similarly property insurance could be treated the same way.  In some countries they go further and allow mortgage interest as a deduction for income tax calculations.  We could give a credit for each child in school which will assist parents in coping and encourage better attendance.  How about credits for installing alternative energy equipment, solar, wind, etc in your house.

Capital Gains

Another area that could be looked at is the area of capital gains tax which is a tax imposed on the appreciation in value of property and equities.    Currently we pay tax on any interest income that we use but gains on capital items attract no tax.  The wealthiest people pay no taxes on their properties and equities but the poorest have to pay on the interest earned on the little money that they have in their savings account.  The tax on interest was imposed at a time when interest rates were high and the government had an insatiable appetite for borrowing.  Remittances are a large part of our cash inflows in Jamaican but should they be considered as revenue in the hands of the recipient.

My aim here is not to increase the taxes that we pay but to ask the question of why some items attract tax and others do not?  In other words we need to look again at the policy with a view to determine which items should be considered taxable income.

See Tax Reform – Personal Income Taxes Part 1