Tax Reform – Personal Income Taxes

In the area of tax reform in Jamaica, related to those persons who are on the PAYE system, there are two suggested changes. It seems to me that since the Jamaican government collects a significant part of its revenue from this system it is reluctant to make too many changes to it.

The first change recognizes this fact and suggests that the tax free threshold should be increased. The persons on the PAYE system bear the heaviest rates of taxes and any increase in the threshold would be welcomed but would that be sufficient. One of the problems that I have with the tax rate is that it is the same at all levels of earnings. We used to have what is known as a progressive rate system in which higher levels of income attract higher rates of taxes. This was changed in the 1980’s to the system that prevails today. There is a lot of debate about which basis is better but currently most western nations use progressive rates including the world’s largest economy, the United States. The system is based on the idea that those who earn more can afford to pay more and that they have an obligation to help fund government services to the neediest in society. Unfortunately many of these social programmes are taken advantage of resulting in payments being made to the greedy and the lazy.

compulsory tax filings

The second change recommended is the installation of compulsory tax filings over time. This would require that every Jamaican whether on the PAYE system or not to file tax returns in respect of each calendar year. Currently most self employed persons from vendors, helpers, hair dressers, etc to doctors, lawyers and accountants do not file an income tax return. Currently no change is needed to affect these persons as the law requires that all persons involved in businesses are required to file a tax return. The aim is to strengthen the law but the problem that I have with this requirement is that if you are not going to enforce the law why bother to have it. The opportunity exists to deal with this problem but successive governments have decided not to enforce the rules. What assurance will we have that this time will be any different? In addition with the proposed restructuring of the public sector will the revenue department have sufficient resources to deal with all of these returns? Currently they are unable to deal with the businesses only, how then can they respond when an additional one million persons are making returns?

In the second part of this article I will look at some possible options for personal income tax that the tax reform committee might consider.