Friday, June 01, 2012

What was the alternative to the budget taxes?

AS expected, the revenue estimates seek to raise an additional $23 billion in taxes from the economy. I expected a maximum of $20 billion in new tax measures, based on my computations, and accept accountability for being wrong by $3 billion.

What I also expected was the usual suggestion that Government should roll back taxes that affect “me” but place them on everyone else. Seriously now, what did we expect when we chose to not go with fiscal stimulus and instead “deal with our debt burden”, and accept bitter medicine now. Did we not expect it to hurt us as much as it hurt Europe?

Tax on telephone calls may have been an effort to lure revenues with minimal impact on local players and the economy.

The latest unemployment numbers (released by the PIOJ) show that 23,000 more persons were added to the unemployment line in January 2012. This is the direct result of the fiscal tightening we chose when the recession hit.

Well let's not cry now over spilt milk, as we should live with the consequences of our choices. The argument that the debt-GDP ratio is too high is a non-argument, as in 1984 our debt-GDP ratio was at 212 per cent, before falling to 90 per cent at the start of the 1990s, prior to the economy growing an average of six per cent per annum in the latter half of the 1980s, which clearly supports the point that what is important about debt is the return versus the cost.

One of the main arguments against new loans is that interest rates would go up. That's true, but as Dr Davies realised in the 1990s, the trade off for lower interest rates, in a low productivity society, is higher inflation. And inflation, in a consumption society like ours, is a greater burden on the poor than high interest rates. So when the price of chicken and corn beef go up we have lower aggregate demand, which leads to less jobs, and eventually more suffering and social challenges.

But this is where we are, so it makes no sense exploring what could have been, as we have already spread our bed. Now we must lie in it.

The question therefore is, was there an alternative to the $23-billion tax package. In other words, could it have been done in another way so that so many persons do not “bawl”? Let's explore what the possibilities were, bearing in mind that any tax package was always going to be contractionary, as taxes always hurt the consumer in the long run.

If one examines the tax lines on the budget, you will see that there are not many areas that one can get many taxes from. These are (i) PAYE and Statutory Deductions; (ii) Customs Duty; (iii) GCT/SCT; (iv) Company taxes; and (v) Tax on Interest.

We can, I think, rule out PAYE, as this would mean a greater burden on consumers leading to even further contraction in aggregate demand and the economy. Similarly, the WTO rules, and the possibility of reduced demand rules out increasing custom duties further. Company taxes come mainly from financial institutions, which still pay the old tax rate (as the rate was not reduced for them) and in any event increased taxes on them would find its way into higher interest rates. And tax on interest would result in increased demand for higher rates and could result in capital flight.

So the only real option we are left with is GCT / SCT rates, and the fact is that at 17.5 per cent we couldn't increase that rate as again it would have a much greater effect on reducing aggregate demand. The only choice left therefore was to reduce the rate marginally while at the same time broadening the base. What is missing is a proper social welfare distribution mechanism, but there was no alternative but to get some money from GCT.

But the GCT money would not have been enough, and therefore one would have to look at other areas that have a high enough volume of activity to guarantee revenue flows. Alas, the good old telephone calls. After all, Jamaicans love to chat and the low Internet penetration rates, means that we talk on the phone more than the free Internet connection. So there was no doubt that money would come from there.

Secondly, in terms of other areas of the economy that have the volume the fiscal revenues can rely on, they were remittances, tourism, and bauxite/alumina. Taxing remittances would see, I think, a slowdown in remittances, as more cash would be sent in the post, and also it would be a burden on the poor who get most of the remittance flows. Also one could not tax bauxite, which is a struggling industry. The only other available option was tourism, which is a shame as we are pressuring an industry that already is seeing a declining comparative advantage.

In deciding to tax telephone calls and tourism, the minister may have reasoned like this, how can I tax these so that it has a minimal impact on the players and the local economy. The way to do that, of course, is to tax the overseas consumers, so this is how the tax would have been placed on the rooms and the incoming calls.

For the above reasons, my view still stands that the tax package presented was very close to the best that could be done, given the fact that we decided to abandon the fiscal stimulus route and go with fiscal tightening. My objections would be to the tax on books, and also that it didn't appear that there was much consultation with the tourism industry re the timing of the taxes, given their contractual obligations.

I have heard suggestions that we should increase property taxes, to fall in line with what exists overseas. Sounds good, but how can we increase property taxes when the collection mechanism doesn't work properly, and in fact is horrendously inefficient. This means that we will still not collect the tax we want unless we fix the system first. Secondly, all it is going to do is increase rental rates, as any well-thinking property owner would pass it on to their tenant.

The next time that someone gets up and says, take the tax off this and that, please provide an alternative.

Monopoly in telecommunications

I wrote an article in early June 2011, pointing out that Cable and Wireless Jamaica was in danger, as their losses were unsustainable, and that there would be no reprieve for them because the regulatory environment at the time did not allow for greater competitiveness, but also because their business model was wrong.

Well Paulwell has ensured greater regulatory competitiveness but I think there business model is still wrong and their ads are really not attractive enough to cause any switch. In any event, even if they were to get many of the Digicel customers with the current business model they would more than likely still lose money.

My concern though is that we need a competitive telecommunications industry, especially in mobile phones, as one player will certainly mean higher cost for consumers. Maybe one of the things that C&W needs to do is spin off the mobile company and make it stand on its own and by doing so maybe they could write back the impairment on the mobile company assets, as future cash flows may not be so threatened.

What is more concerning than the $20-billion revenue statement loss however, is the negative cash being generated from operations, as the $15-billion write off is really a noncash item based on the expected viability of the company, but the negative cash from operations is more threatening to everyday business.

For the sake of the consumer I really hope that C&W makes the appropriate strategic decisions, and saves the company, as competitiveness in the sector is critical for Jamaica.

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