Friday, February 17, 2017

The budget’s alternative facts

It’s that time of year again when businesses and people get edgy, and in some cases hold off on plans until the minister of finance speaks and reveals the tax package.

The fact is that tax policy has a direct bearing on economic growth and development, which is something our governments have failed to understand, as tax policy over the years is devised through political statements on platforms rather than through consultation with the technocrats.

So the politician gets on the stage and gives an impossible directive such as ‘ye shall fly’, and then says to the technocrat that they need to make them fly, even while it is not possible.

The consequence of this type of approach is that we have a tax framework that doesn’t encourage production and development, but rather takes pride of place in the 2016-17 Global Competitiveness Report as the third most problematic factor to doing business in Jamaica. And in fact it has consistently been in the top five most problematic factors over the years.

Obviously this means that politicians do not read this report, because if they did we would have done something about it years ago.

This is why when the Matalon report came out in 2007, and the Private Sector Working Group on Tax came out with their 2012 report, the Government just cherry-picked what they wanted from it and ignored the statement that the measures would only be effective if implemented as a whole. The fact is that the expediency of funding the budget was more important than long-term development.

Today, because of this naïve view of our policymakers, we still grapple with the same fiscal challenges we had 10 or even 20 years ago. So today we are faced with a budget deficit of close to $20 billion, and an expected tax package in the billions of dollars. And as usual, tax policy is merely a mathematical and allocation exercise, rather than one geared at driving growth.

One of the major challenges facing the Government over the years is that of low tax compliance. This is evident in the fact that even though the employed working force is estimated at 1.15 million people, just over 320,000 (around 27 per cent) are registered for payroll taxes.

But last year, instead of going after compliance, it was easier to impose a higher tax rate on people above the $6-million level. The promise, though, was that the move would be temporary — as the minister committed last year that in the upcoming year these people would enjoy the full $1.5-million threshold and the rate would not be increased. This is expected to be so as the minister is someone who sticks to his commitments, as evidenced by the $1.5-million threshold implementation.

What this would mean is that the additional $19-billion income tax increases on individuals should come from compliance measures, given the low percentage of people working who are registered for PAYE.
When I do some analysis on the revenue estimates for 2017/18, however, it again betrays the intended policy to move towards indirect tax, as the 2016/17 direct tax as a percentage of total revenues is 27.8 per cent, while the 2017/18 estimate is 29.8 per cent — suggesting a move in the opposite direction. This of course needs explanation.

This math exercise every year, in my view, speaks to the lack of innovative ideas and vision of our leaders over the years. Any society that is concerned about development and growth does not look only
short term at revenue collection and expenditure management, but addresses its mind to what needs to be done to encourage growth.

This is where I think our governors continue to fail us.

It is not all bad news, however, as since the economic reform programme started in 2013, we have admittedly seen legislative and fiscal changes to encourage growth and stability. But in my view it is not fast enough to cause the paradigm shift we need. And unless we start doing what’s necessary to cause this paradigm shift, we will remain behind our competitors in terms of development, which we must understand is relative.

Every year we continue to play a wait-and-see game to find out which sector is going to be called upon to finance the budget, but the truth is that our time is not being efficiently spent doing so.
The debates and analysis will continue in the media about what taxes will be raised and which ones will decline (mainly because of political announcements). But there is not enough talk in the media about the need to use tax policy to drive growth.

We have seen examples of the Employer Tax Credit resulting in Corporate Income Taxes increasing, and the tax incentive on the Junior Stock Exchange resulting in significantly more employment, payroll taxes, and consumption taxes. But yet still we have not embraced the fact that if we were to make the tax environment more competitive, primarily with lower rates, then we may actually see more economic activity. Again, just look at the Global Competitiveness Report.

The conversation we therefore need to have each year is not one about wondering if the minister is going to ‘hit me’ this year, but rather what tax policy should be introduced to spur development.
In Panama, for example, the law protects investors on the same terms as the investment was made. In the US tax rates are set out three to five years in advance. Therefore, investors and people can plan their business and have confidence that the decision they make today will not be altered by any political decision for the next five years.

This is the “alternative fact” of what budgets and debates should be about. For this to happen though we need to change how we think. In other words, we need to have a vision for development.

We need to not continuously seek to place one group against the other. And we need to understand that encouraging capital to make as much money as possible is to the benefit of the whole society.

The question therefore is: is it possible for us to make this paradigm shift in our thinking and reveal the “alternative facts”?