Saturday, December 26, 2009

No new taxes: a better alternative

As usual in Jamaica we consume ourselves with arguments around the wrong alternative. So instead of discussing the real issues that will carry the country forward we end up being caught up in the political and social spins on the various issues.

The fact is that the recent discussions re the tax package, as to how much burden the rich or poor should bear, is really a redundant argument. Empirical evidence and logic show that you can't help the rich by burdening the poor and similarly you can't help the poor by crucifying the rich. The latter is supported by the rich taking up the offer of "five flights a day to Miami in the 1970s" and the former supported by the recent decimation of the US consumer in 2007/8, which caused economic declines, and a worldwide global recession.

Poor and rich suffer together
Economics does not distinguish between rich and poor, like politics, and is concerned with things like total money in circulation and the multiplier effect. I don't remember, limited as my knowledge is, looking in any economics book and reading about whether to burden the rich versus the poor. So once again politics takes the forefront in Jamaica, in the face of a worsening economy.

My argument has always been, and continues to be, that any new taxes within the context of an already declining Jamaican economy are more likely to shrink the economy and lead to lower tax revenues rather than increase it. This of course assumes that the other two arguments forwarded holds, that is (1) no new debt; and (2) reduced government expenditure.

It is only logical that if an economy is stagnant or declining (that is no real growth from production) at say $1 Billion, there is no new input in it from loans or other external funds, and in addition taxes are taken from the economy, then logically the economy must shrink. So we can verify this by assuming the following:

The table clearly shows that without any growth in the economy, if money is taken out then the size of the economy will contract and subsequently the tax collections will decrease, instead of the intended effect of increasing revenue.

This I think is borne out by Jamaica's fiscal numbers over the years. Looking at the fiscal numbers between 2003/4 to 2008/9, the government has increased taxes every year for a total tax increase over the period of $115 Billion. Over the same period the total new debt was $232 Billion, and was the only reason why the economy managed to grow, and also the only reason why the government was able to collect the increased taxes. So it stands to reason that if there is to be any increased economic activity or even a maintenance of the current economic activity, then the only way is for new loans to be introduced into the system.

Replacing higher cost debt
One way that the government is correctly doing so is by replacing the higher -cost debt with lower-cost debt. That again is another argument and I don't think it will have the effect intended for other reasons, but I will not get into that here.

On the other hand if the rate of taxation were to be reduced by 2%, at a multiplier effect of 4, then the government could in fact collect marginally more tax than is currently the case. This could be further increased if through fiscal policy, crime falls bureaucracy is addressed thus allowing the multiplier effect to increase.

The logical conclusion then is that the way to find ourselves easing out of this vicious downward spiral is to (1) withdraw the government influence on the economy in the form of taxes and the bureaucracy; and (2) improve the multiplier effect by introducing fiscal measures that will increase confidence and the economic outlook.

So the argument that we have been having over the past week on whether to tax the poor or rich is really based in politics rather than economics, as proper economic policy dictates that in times of recession less taxes and increased stimulus is needed as promoted by Maynard Keynes. This theory has been successfully used in the recent recession.

So my view is that what is needed is not new taxes but a stimulation to the economy, and a restructuring of the bureaucracy and fiscal policies to engender the much needed paradigm shift. Unless that is done then I am almost certain that we will be speaking about the same issues next year, only from a worse vantage point. A year ago I had told all who criticised me for saying we need to look at restructuring the cash flows re the debt that we would be talking from a worse position a year later.Need I say more?

Poor customer service continues
A few months ago I wrote an article about poor customer service, and this seems to be growing worse. It seems as if this has escalated with the harder economic times. Only a few months ago I had experiences with two listed companies calling me about money I did not owe them, only to apologise and say that their systems had messed up.

Just this week Scotiabank, who I have a mortgage with called me on three different occasions to say that I had missed a payment. This was after a similar incident about two months ago. One lady even insisted that I (the customer) was wrong, wasting my time for five minutes and refusing to hang up when I told her she would have to call back as I was in a meeting. Well, she didn't call back but I had to call someone and tell them to stop wasting my time. Again the excuse is that the system was not working properly. Similarly NCB wrote to me a few months ago to say I owed them for a card they had sent me, which I had not requested and I had never accepted or used. They also blamed the systems.

Poor Jamaicans. We are let down not only by our governments over the decades but also by the poor customer service from various institutions. I long to see the day when the Jamaican citizen is put first.


katty said...

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