Need deeper study of income initiative

THE PLANNING Institute of Jamaica’s (PIOJ) conclusion that it is better-off Jamaicans who will mostly benefit from the initial phase of the administration’s tax-reform initiative is hardly surprising. For, as everyone knows, and as the PIOJ indicated, indirect taxation tends to be regressive.

The initial finding, however, doesn’t tell the whole story, either in terms of impact of the measures on households or the potential efficacy of the intention of the Holness administration to shift the burden of gaining revenue to indirect taxes. Clearly, there is much more work to be done.

In two tranches, the second one implemented at the start of the current fiscal year in April, the Government lifted the threshold from J$592,800 to J$1.5 million, thereby giving up around J$16 billion a year in revenue from PAYE employees.

When Prime Minister Andrew Holness’ party initially floated the idea, it miscalculated the costs and assumed that it could be achieved without offsetting measures. Fiscal realities dictated otherwise and the proposal morphed into a broader tax-reform initiative, which the Government believes will address weaknesses in tax collection while inspiring savings and consumer-led growth. On these expectations, the jury remains out.

PURCHASING POWER

On their analysis commissioned by Parliament’s Public Administration and Appropriations Committee, the PIOJ found that in the wealthiest 10 per cent of Jamaican households, which had at least two members earning above the old income threshold, the give-back will raise their purchasing power by 6.5 per cent. However, higher prices on the goods to which the new indirect taxes apply, shaving 2.1 per cent from this gain, brought the net increase in their purchasing power to 4.4 per cent. In the next richest decile, the net gain is 3.5 per cent.

By contrast, the five poorest deciles – even with their limited consumption of the goods subject to higher taxes, but with fewer of their households benefiting from the higher income-tax threshold – face net declines in their purchasing power of between 0.1 per cent and 0.6 per cent. However, for the poor households on the Government’s PATH social welfare, the decline will be offset by a proposed 30 per cent increase in cash grants.

What this study doesn’t do, which must be an urgent undertaking by the PIOJ, is analyse the indirect impact of the measures; how increased costs for the immediately affected goods and services affect the prices of other goods and services and, ultimately, people’s purchasing power.

Further, there is need for deeper analysis of whether there has been a real offsetting effect, minus the impact of inflation, of the new taxes on the forgone PAYE revenue and whether, indeed, putting the additional cash in some people’s pockets is proving, as the administration hoped, a stimulus to the economy.

So far, the ‘evidence’, either in justification or refutation of the experiment, has, except for this limited PIOJ report, been largely anecdotal. The ultimate test lies in empiricism.