Revenue neutral is not tax neutral

THE GLEANER of May 21, 2016, quotes International Monetary Fund (IMF) Mission Chief Dr Uma Ramakrishnan as stating that the Government’s 20162017 Budget “is being done in a prudent and responsible way so that it is fully revenue neutral in order not to impact the primary surplus target that has been agreed”.

What does “revenue neutral” mean? It means that despite the income tax threshold being raised from J$592,000 to J$1,000,272 – the Government will collect J$12.5 billion less in personal income tax – the State will gather J$13 billion in new taxes from other sources. Revenue neutral.

The IMF really does not care where the taxes come from as long as the Government collects the same amount of revenue.

During his 2017-2018 Budget presentation last week, Prime Minister Holness defended this year’s $17.5-billion package of additional taxes (on top of the J$13 billion last year) by stating that the measures offering tax relief to those who earn up to J$1.5 million per annum will result in no change in the amount of revenue going into the Government’s coffers. “The net effect on the revenue of the Government is zero,” PM Holness insisted. In other words, it is revenue neutral.

Prime Minister Holness really does not care where the taxes come from as long as the Government does not collect less revenue. But it does matter! The Government is offering a total of J$30 billion in tax relief to one set of taxpayers (the middle class earning up to J$1.5 million per year), while collecting J$30.5 billion in additional taxes from another set of taxpayers. So as far as the Government and the IMF are concerned, the new tax package is revenue neutral because the total amount of tax relief is equal to the amount of new taxes, but for the individual taxpayer, the Budget certainly is not taxation neutral! Some will pay less tax, but some will pay more.

PROGRESSIVE TAXATION

This is not a problem if the people who earn more are asked to pay more tax and those who earn less pay less tax. This is called progressive taxation. But if those who earn more will end up paying less tax, and those who earn less (or nothing at all) will have to pay more tax, this regressive taxation is injustice – pure and simple. It would be a naked transfer of wealth from the poor to the rich.

Which kind of taxation have these last two IMF-supported revenue-neutral budgets implemented: progressive taxation or regressive taxation?

Simply switching from direct taxation to indirect taxation is regressive and places a greater tax burden on the poor. The poor earn less than J$592,000 per annum (or J$2,277 every day of a five-day workweek) and were not paying income tax anyway so were never offered a tax break. The present minimum wage is J$6,200 per 40-hour workweek (or J$1,240 every day of a five-day-work-week). Minimum-wage workers were never offered a tax break in the first place. They have never been subject to direct taxation.

But the poor have always been subject to indirect taxation, mostly by paying GCT on items they consume, and special consumption taxes (SCT) on certain items (like gasolene, alcohol, and tobacco). Reducing direct taxation and increasing indirect taxation will benefit those who pay income tax (those better off) and will hurt those who never paid income tax.

Lowering the GCT threshold on electricity bills is directly aimed at collecting more from the poor (those who consume less).

REGRESSIVE TAXATION

How governments try to address this regressive taxation is through cash transfers directly to the poor (through, e.g., PATH, NIS, Poor Relief, political patronage), and offering essential services to the poor free of charge (e.g., no school fees, no auxiliary education fees, no hospital fees, no health clinic fees, the National Health Fund, Jamaica Drugs for the Elderly Programme). The trouble is that the wealthy who can afford to pay for their health care (and often do – overseas) and the education of their children (and often do – in private schools) also benefit from these ‘free services’.

In the end, regressive indirect taxation benefits the wealthy and hurts the poor, and that is where the last two revenue-neutral Budgets have taken us. It reminds me of the 1980s when the Seaga government abolished the progressive sliding scale income tax system and introduced the regressive flat income tax rate, which was a tax break for the wealthy. Successive PNP governments continued this regressive income tax system.

I encourage the Government to study seriously the implications of switching from direct to indirect taxation and to take whichever decision will bring prosperity to the poor, rather than making the wealthy better off.