Aubyn Hill
ONE OF the beneficial changes that were announced by the Minister of Finance in his recent budget speech is the substantial reduction in estate taxes that persons who inherit estates have had to pay on the death of their benefactors.
Dr. Omar Davies has instituted a lower (relative to the higher rates in the old regime) rate of 7.5 per cent which acts like a flat tax on the entire inherited value after the first $100,000 exempted amount. This is good news.
The minister really needs to take a more radical step to address the relatively high transfer tax and stamp duty that buyers and sellers of property in Jamaica have to pay on each transaction.
The transfer tax at 7.5 per cent and the stamp duty at 5.5 per cent are very high (and some would say quite anachronistic and onerous and should be abolished), and together make a tall base on which the providers of other related services such as lawyers, surveyors and real estate agents charge equally high fees.
BURDENSOME COST STRUCTURE
Today, the seller of a piece of property has to fork out fees as itemised in Figure 1.
For there to be a completed transaction, there must be a seller and a buyer and the typical costs of a buyer are itemised in Figure 2.
It is clear that if a retired couple wants to sell the family home and wishes to buy a smaller townhouse, they are looking at a prohibitively costly 27 per cent to 29 per cent as expenditure on the two transactions.
In the United States, closing costs fall in the eight to 10 per cent range.
This Jamaican cost structure is often a burdensome disincentive to many people to initiate these land sale transactions.
NEGATIVE OUTCOMES
The 13.5 per cent government charges (transfer tax, stamp duty and registration fee) are clear and strong encouragement for both seller and buyer (and some agents of the government) to collude and cheat the government of a substantial portion of this high combination of taxes.
Alternatively, this onerous burden often encourages people to hold tracts of land that should probably be sold to other persons who can use it for productive and legitimate economic activity.
Given that the Stamp Office enters into subjective assessments, another reaction from buyers and sellers of land is to enter into very aggressive (and sometimes acrimonious) negotiations with these government officials.
All these negative outcomes could be avoided if the outdated stamp duty and transfer tax were abolished, or significantly reduced on the way to
abolishment.
LOWER RATE
For example, a three per cent transfer tax and a small flat charge for stamp duty and registration services would act as an incentive, compared to what exists now, for many more people to enter into property transactions that would give a boost to economic activity in the country.
The lower tax would also remove the reason to enter into any underhand arrangements with tax officials.
Quite often, the only asset of significant value an entrepreneur possesses that can be converted to cash is a piece of land that he or she owns. The prohibitive transfer tax and stamp duty along with the other fees that accompany a sale and purchase trans-action hinder some entrepreneurs from getting started.
The government could restore, and probably even increase, revenues that may be lost ($4 billion in 2003, including taxes on sale of securities) after the proposed drop in rates.
The lower taxes and sale costs will induce a much larger number of transactions on which a higher GCT will now be levied.
Much of the property in this country is quite undervalued one reason for the subjective assessments by the Stamp Office.
REVALUE LAND
Revalue the land across the country, starting in the Corporate Area, but also in towns in rural parishes.
Get university students, bright six formers and retired, experienced people to conduct the evaluation every five years or so.
These new valuations, now including large swathes of land on which taxes were avoided, will become a source of substantial additional revenues on a relatively small number of voters.
Aubyn Hill is managing partner of Corporate Strategies Limited, a restructuring and financial advisory firm. Respond to: writerhill@gmail.com
