Aubyn Hill
THIS PAST week I heard our very respected tax tsar, Clive Nicholas, speaking on the radio about Jamaica's inability to collect all its taxes and, by inference, the complexity of our tax system.
Albert Einstein once observed that "The hardest thing in the world to understand is the income tax." I believe the overriding majority of Jamaican taxpayers share this view and are painfully aware that our current tax system is a nightmare of complexity.
It is time that Jamaica put in place a flat tax system that is simple, transparent and very user-friendly.
SIMPLIFY AND CLARIFY
I urge the Minister of Finance, Dr. Omar Davies, to move quickly to implement a flat-tax regime on personal and corporate income taxes. Adam Smith argued that there were four canons of taxation: equity, economy, convenience, and certainty. Modern economists added two more: efficiency and flexibility.
Flat taxes are easy to understand, clear and simple to administer. In many countries, the complexity of tax legislation makes businesses and individuals afraid and uncertain of the tax system. Certainty is a Smithian canon of taxation - and this is increased by a single flat tax.
The notion of 'economy' means that taxes should cost little to administer. Reducing bureaucracy and form-filling by a single flat tax will mean that more of the yield can be spent on provision of public services.
Flat taxes reduce chances for evasion (illegal) and/or avoidance, as there will be fewer complex loopholes exploited - particularly by the richest individuals who can afford to do this at present.
Flat taxes are far more convenient to the citizen to pay as well as economic for the government to collect. A flat tax regime in Jamaica would make Mr. Nicholas' life much more
predictable and easy.
GCT - A FORM OF FLAT TAX
There has been significant progress on capital gains tax relief, dividends tax relief, and some modest improvements on individual income tax rates (compared to earlier decades).
The next major important positive step has to be for the government to move to a flat tax approach for corporate and personal income taxes.
The idea of a flat tax approach is not an entirely new one. The General Consumption Tax (GCT) is the flattest tax of all. It is a very uniform rate on purchases and therefore taxes when money is spent rather than earned.
It is very simple to manage - in terms of certainty to those who are taxed and certainty of collection to the Government.
The GCT provides a clear incentive to move more along the direction of a flat tax than to stay with the complexity of the present format.
FIRST MOVER ADVANTAGE
Instituting a clear and simple flat tax regime (after suitable planning, education, and implementation) would give Jamaica a 'first mover advantage' in the CARICOM states and the wider Caribbean region.
Jamaica could lead the Caribbean as Estonia did the Baltic States - and further east - in 1994. When it made the change, Estonia replaced the three tax rates on personal income and another on corporate profits with a 'flat tax' rate of 26 per cent. It was simplicity itself. It ruled out exemptions.
Latvia and Lithuania, Estonia's Baltic neighbours, followed its example very quickly. Russia was next to
follow in 2001 (Lenin, Trotsky, Marx, and Stalin must have all rolled in their communist graves!) and three years later Slovakia imposed a uniform 19 per cent rate on personal and corporate income.
Poland plans to follow Slovakia, but with an even lower flat rate of 15 per cent. So far, eight countries have
followed Estonia. Jamaica could be the Estonia of the Caribbean - both as a first mover and a leader in economic growth.
FLAT TAX - AN ENGINE FOR GROWTH
The Estonian economy has recorded impressive growth since its 1994 flat tax reform. Its growth hit double digits in 1997 and since then has been bubbling along at about six per cent annually.
Its practical experience also silenced the naysayers who believed that repealing its high tax rate on the rich would erode the countries tax base. The empirical data show that in 1993 general government revenues were 39.4 per cent of GDP; in 2002 they were 39.6 per cent. The result has been so positive that Estonia plans to cut its flat tax from 26 per cent to 20 per cent by 2007.
But probably the most fascinatingly positive result of the flat tax comes from the most unlikely country - the former Soviet Union.
Since instituting a flat tax of 13 per cent on personal income tax (it collapsed 12 per cent, 20 per cent, and 30 per cent bands into a single uniform rate), the former Soviet 'bear' has been transformed into a raging 'bull' - the kind of bull of which Wall Street would be proud.
In 2001, income tax collections rose 47 per cent, or 28 per cent if adjusted for inflation, and, in 2002, real tax revenues rose another 20 per cent.
During this period, economic growth averaged about 4.6 per cent (a really high growth rate for a very big country), while many other countries' economies continued to stagnate or contract.
The New York Times, probably the newspaper in the United States with the most ingrained and visceral position against the flat tax, had to concede begrudgingly "Russia imposes flat tax on income, and its coffers swell."
Before Russia adopted its flat tax, countries that had adopted a pro-growth tax system were small city-states like Hong Kong and small countries like Latvia and Estonia all of which benefited from the flat tax. After Russia's obvious success, the Russian model has been adopted by the Ukraine which scrapped its five-tier progressive tax scheme with a 13 per cent flat tax. Regional tax competition spurred by the success of the Russian flat tax has compelled Communist China to consider adopting a flat tax by reducing their 45 per cent top personal income tax rate to a more reasonable 20 per cent.
JAMAICA SHOULD MOVE NOW
Jamaica should take the lead in moving to a flat tax regime as quickly as possible. In the case of personal income tax, the threshold of exemption for the poor can be reconsidered and raised for the sake of equity, but empirical data in other countries show that the rich pay about as much tax under the flat tax regime as they do under the orthodox code. This negates the position of opponents who generally level the 'unfair' argument. The flat tax idea is one whose time has come.
Aubyn Hill is managing partner of Corporate Strategies Limited, a restructuring and financial advisory firm. Respond to: writerhill@gmail.com
