Friday, May 09, 2003

Alternatives to Government’s 4% Cess

The introduction of a 4% cess on imports by Government is currently the most disturbing issue to business leaders. This is understandable as it will have a devastating effect on businesses (even those that are exempted) and the economy as a whole. While Agricultural and some manufacturing entities will not be required to pay the cess directly, they utilize the services of companies that will bear the burden of the cess. If these companies are operating on small margins or are unprofitable they will have no option but to pass on this cost to their clients/customers.

In a previous article in this publication, I highlighted the negative implications of the cess on companies’ profitability. I further propose that we will also see negative effects of the cess on the economy such as:
· Reduced company profitability and ultimately lower tax revenues to government. This is be compounded by the fact that the additional 2 – 3% cost of capital may prove too much for some businesses to remain operational.
· Reduced investments as overseas and local investors will have to face an added cost which will no doubt make Jamaica less attractive in comparison to its competitors in other regions;
· Increased unemployment resulting from business closures or cost cutting measures. This too will ultimately lead to lower tax revenues and increased expenditure on social support programmes due to increased unemployment;
· Increased international trading uncompetitiveness; and
· Increased costs to sectors such as tourism, as hotels will no doubt have to increase rates to compensate for the added costs generated by the imposition of the cess.

While many agree on the negative impact of the cess, there is no doubt that the government needs additional revenue to service our ever-increasing national debt. The Minister of Finance has said this in no uncertain manner and it is a fact that we cannot ignore. It is obvious that the cess has been introduced as a measure to provide a credible source of revenue for our creditors and to save us from the consequences of not being able to service the debt. I also agree that there is not much to be salvaged on the expenditure side of the budget, as debt accounts for 64.45%. There has to be a credible revenue source, as the fact is that if revenue is not forthcoming this year then there may not be a next year to speak of.

If we agree that additional revenue is necessary and savings from the estimates of expenditure will not be substantial, then is there an alternative to the cess? Not only do I think that there is a more credible alternative to the cess, but I also believe that failure to find an alternative will have serious consequences. We all agree that the only way to solve our problem is through production. The cess will have the opposite effect on production, and create its own future revenue problems, and so we need to find another solution to this tax measure.

What is needed is an alternative to achieve the same revenue objectives and will not be as counter-productive as the cess. A credible alternative revenue source was proposed by Mrs. Ethlyn Norton-Coke at a recently held ICAJ public forum. Mrs. Coke posited “Abolishing personal income tax (with a ceiling on the income exempt…) and increasing GCT to 25%...which is more equitable…as all persons would be brought into the tax net.” GCT is not only a difficult tax to avoid but is also more efficient than income tax. It is difficult, for example, for the informal economy to avoid GCT and easier for the authorities to collect this tax. In addition, the tax dollar collected from GCT costs less than that collected for personal and company income tax. The authorities expend less effort to prove a GCT liability, as it is a simpler tax to monitor and compute. The added implication is that expenditure in tax collection could be reduced.

The additional GCT that could be collected from this effort can be easily computed from the tax breakdown (2002/3) provided by the Budget Memorandum. PAYE accounted for 22% and GCT 26% of tax collections, or $22.6 and $26.78 Billion respectively. This means that if we were to increase GCT to 25% then this would mean adding some $17.85 Billion to GCT, which is close to the amount from PAYE. This would be without the broadening the GCT net.

If PAYE were removed then this would also have the effect of reducing companies’ administrative cost and also removing the cost of companies’ contribution. This would ultimately result in greater profit margins / consumption and thus higher taxes, so that although the direct impact is less than the 22%, there is an indirect revenue flow that could make up for the shortfall. I am also proposing a reduction of the PAYE rate to 5%, which would mean income of $4.52 Billion, an amount greater than the $3.4 Billion to be collected from the cess. There should also be a commitment to totally remove PAYE, which would again spurn greater consumption and increased GCT. Within the year we would cover our revenue position and within 2 – 3 years increase it while increasing consumption.

The question may be asked, what will happen to the persons employed by income tax that will no longer be needed. There is no doubt that some would be absorbed by GCT but many could be employed in the private sector, as companies would not have the added cost of PAYE administration and contributions. Companies would employ persons to increase their productivity, which they are currently restricted from doing because of the high cost of labour. Increased revenue to companies and individuals would no doubt encourage consumption that would fuel more investments and ultimately higher tax revenues, in the short to medium term, as is being done through tax cuts in the United States.

This alternative would have the following advantages over the cess:
1. It is a credible revenue source and in the long term is more sustainable than the cess;
2. It is a tax on consumption and not production and while consumption may contract locally it leaves the producer with the option of international markets at a more competitive price;
3. It will not inhibit new investments compared to the effects of the cess;
4. The cost structure for sectors such as tourism will not be adversely affected and
5. Employment may be increased as companies would be able to afford much needed labour.

In all of this we need to remember that we should not tax production as the effect of this is ultimately disastrous.

A Note on the Debt
In 2002/3 we paid out $152 Billion in debt payments, of which $90 Billion represented principal amortization. We added $122 Billion to the debt stock. In 2003/4 we estimate that we will pay out $169.5 Billion, of which $90 Billion will be principal amortization. We estimate that we will add $116 Billion to the debt. The trend is that we are adding more debt than we are eliminating. In 1990/1 the total debt stood at $45.8 Billion. Today it is $601.2 Billion. What will be the debt position in 2004/5? Will we need additional revenues to address this? This further supports the point that we need to produce our way out of our debt problem and so short term solutions such as the cess will not help. We, therefore, need long term planning and measures to stimulate profitable growth or else 2003/4 will be nothing compared to 2004/5.


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