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All eyes on Shaw - Finance minister to open Budget Debate, reveal $1.5m plan today

Published:Wednesday | May 11, 2016 | 12:00 AMEdmond Campbell
Minister of Finance and Public Service Audley Shaw (centre) meets with Fayval Williams, state minister in the Ministry of Finance, and Devon Rowe, permanent secretary in the finance ministry, in final preparation at his Heroes Circle office yesterday.
Chung: Our recommendation at the PSOJ is that we look at broadening the GCT base. We think that the whole principle of moving from direct to indirect taxation is definitely something we should do.

When Finance and Public Service Minister Audley Shaw opens the Budget Debate in the House of Representatives this afternoon, the country will be listening intently to hear details of how the Government plans to raise billions of dollars in additional revenue to fund the controversial $1.5-million tax initiative the Jamaica Labour Party (JLP) promised in the run-up to the February 25 general election.

Financial analyst Dennis Chung said Shaw's Budget presentation should be built around the $1.5-million election commitment made by the JLP.

He, however, urged caution in how any tax plan is implemented, noting that tax measures used to fund the payment of the tax-free benefit could have an inflationary effect on the economy.

"Even an issue such as putting money in the hands of people to increase consumption, while this is good for economic activity, it does not necessarily guarantee economic growth," said Chung, the CEO of the Private Sector Organisation of Jamaica.

"If you have more money out there without the production taking place, then what you are going to find is that people are going to go for imports, and it could drive inflation."

Emphasising that the Government should ensure that it maintains fiscal discipline going forward, Chung said the PSOJ had suggested that the tax relief be implemented in two phases.

"Our recommendation at the PSOJ is that we look at broadening the GCT (general consumption tax) base. We think that the whole principle of moving from direct to indirect taxation is definitely something we should do," he said.

Commenting on the sustainability of the $1.5-million tax plan, Chung said that without the requisite productivity the plan would not be sustainable.

"If you give people a salary increase and you don't have anything to back it from a productivity point of view, you are basically pushing inflation."

He argued that if the $1.5-million plan is implemented, only 90,000 PAYE workers would be left on the tax roll, with a labour force of 1.3 million people.

The Andrew Holness administration has insisted that it will remove income tax from the salaries of persons earning up to $1.5 million annually. However, its proposed April 1 introduction of the tax relief has been missed, but a commitment has been made to pay the sums retroactively.

With the proposed changes in the tax policy, those targeted to benefit could take home up to $18,000 more per month.

One of the first voices to raise caution in relation to the tax plan was that of businessman Joseph M. Matalon, who also chairs the Private Sector Working Group on Tax Reform.

Matalon had argued that the proposal, as structured, would create challenges for employers in rewarding and motivating staff, and would adversely impact productivity.

When the tax relief was first articulated by the JLP, Matalon argued that the Government's proposal was "inequitable and distortionary, and would disincentivise persons earning marginally below $1.5 million from seeking additional income (whether through overtime, increased salary, bonus or promotion), as they would become worse off until their income rose sufficiently to offset the additional tax".

However, Shaw later signalled that the Government was also contemplating providing relief for persons earning more than $1.5 million.

In April, Shaw told The Gleaner that the Government was in the process of working out the formula to be used in the implementation of its plan to increase the personal income tax threshold to J$1.5 million.

When quizzed if he had identified a specific source of funding for the tax proposal, Shaw said the Government had found more than one specific area.

In the meantime, as Shaw opens the Budget Debate, a team from the International Monetary Fund is expected to be in the island to carry out the 11th and 12th reviews under the four-year economic support programme.

The Government's tax-reform plan has three components, one of which is the full exemption from income tax for persons earning income up to $1.5 million per annum.

In addition, persons earning income above $1.5 million and less than $5 million per annum would continue to be taxed at 25 per cent on their income in excess of the current tax-free threshold of $592,800.

Further, persons earning income in excess of $5 million per annum will be taxed at the rate of 25 per cent on their entire income as the tax-free threshold of $592,800, from which they currently benefit, would be withdrawn.