Goodleigh - File

The Jamaica Confederation of Trade Unions understands that the 'individual income tax' can represent certain advantages for tax administration; advantages by way of revenue adequacy - the redistribution of income - the support for social policies, the provision of a tax handle for PAYE contributions, and assistance in the dampening of other tax rates.

The Confederation also understands that payroll programmes have been a traditional way of financing social insurance programmes; these programmes can provide a link between taxes and earnings for the individuals while working, and benefits from pensions when the individual retires. We are equally cognisant of the fact that these programmes ideally can act as a tax handle - that they can be broad-based and that they are possibly hard to evade - that they can provide high-revenue adequacy at low tax rates.

We are also aware that ideally they can come out at low administrative cost, that they cause few economic distortions and are an ideal tool for distributional purposes.

Despite these anticipated advantages for both the Individual Income Tax and Payroll programme, the fact is that historically, in Jamaica, those advantages are jeopardised by a culture of tax evasion. This has been encouraged by weak tax administration and the inability or unwillingness of the Jamaican political system to enforce the tax laws of the nation.

This failure of fiscal policy has resulted in an unfair and unjust tax burden being placed on 350,000 PAYE workers, many of whom are union members.

This injustice and disproportional tax burden is clearly manifested by the following indicators:

A. ISSUES OF THE CURRENT SYSTEM

Coverage

PAYE: 940,000 Employed (STATIN, 2001)

Table 1

Potential PAYE - 470,000

In PAYE tax net - 350,000

Outside PAYE net - 120,000

Table 2

Self-employed:

Potential in tax net - 470,000

Returns filed at some - 25,625

point for 2001 tax net

Outside - 444,375 (94%)

The stated advantages of payroll taxes and contributions - Education Tax, National Insurance Scheme, National Housing Trust and HEART are also undermined by a culture of tax evasion, weak tax administration and the lack of political will by the Government.

B. PROBLEMS

1. The bases of the programmes have been substantially reduced by evasion, especially among the self-employed. This has lead to large, but largely unknown, revenue losses.

2. The programmes introduce substantial horizontal inequities between public and private sector employees, between individuals who work in the formal sector and those who work in the informal sector, between those with a larger share of income in untaxed allowances and those with a smaller share, between PAYE and self-employed individuals, and between those who evade and those who do not.

3. The programmes introduce substantial vertical inequities due to the regressive distribution of tax and contribution burdens.

4. The tax rates that finance the social security system (National Insurance Scheme, or NIS) are lower than those of most other countries. However, the combined marginal tax rates of the various other payroll programmes are high, by international standards. In total, these programs add a significant extra tax burden, mainly to PAYE workers.

5. The programmes create economic distortions, as individuals and employers adjust their behaviour to evade the taxes and contributions. A particular unnecessary distortion arises from the high tax rates on labour (in combination with subsidies and incentives to purchase capital), which discourage the hiring of labour and help contribute to the high unemployment rate in Jamaica. The effect of the programme on savings is uncertain.

6. There is much in the separate administration of the programmes that is wasteful and duplicative. Many of the same functions are performed by the respective government agencies that administer the programmes, but there seems to be virtually no coordination among these agencies.

7. From the perspective of individuals and firms, there is also much that is costly and cumbersome to comply with, in the payment of the taxes and contributions.

8. The failure of the fiscal system not only represents an injustice to 350,000 Jamaican citizens, but has acted as a barrier to Jamaica's social/economic development and contributed to the poverty and unemployment among its citizens.

9. These circumstances have arisen in the context of:

a) The historic inability or unwillingness of the Jamaican political system to enforce the Tax Laws of the country and the failure to understand that an efficient and equitable tax system is crucial to establishing a Basic Social Contract with the citizens of Jamaica.

(b) The continuing failure of our political system, the resultant low tax morale among Jamaican citizens and the growth of the culture of tax evasion have led many Jamaicans to opt for an exit and to the growth of informality. It is a self-reinforcing cycle. The State has been unable to provide public goods and services that our citizens value. There is no societal pressure for contributions or participation in the circuit of taxes and transfers established by the State. Jamaican citizens have a strong incentive to go into and remain in the informal sector, underground.

(c) Many citizens have a shared rationalisation that the state is corrupt and that clientelism is rampant, with a disproportionate share of state-sponsored jobs and benefits going to the supporters of the political party that forms the government of the day. The state's weak tax administration, the prevalence of a culture of evasion, low tax morale and a growing cynicism among our citizens are resulting in the eroding of the willingness of all Jamaicans to pay taxes and especially those who do pay, when they observe their friends, neighbours and colleagues not paying taxes.

10. The Confederation is contending that all these circumstances are starting to have a negative impact on the social fabric of Jamaica.

11. It has created a sense of injustice among the 350,000 PAYE workers who are forced to pay taxes on their income, while observing their self-employed counterparts remaining tax free.

12. It has empowered the tax evaders and contributed to the belief that 'freeness exists'.

13. It has promoted a growing informality in the nation's income-earning activities - activities, increasingly, in which the state is neither regulator, provider, police officer nor tax collector making the benefits of informality for both worker and employer far outweigh the benefits of formality.

14. It has created a dysfunctional interaction between individuals and groups and the state. This flawed taxation system, this lack of fiscal principle has implicitly or explicitly robbed our democracy of the most basic 'social contract' - an equitable and efficient tax system.

15. The political failure to comprehend the need for that basic social contract, tax reform and the absence of explicit social policy objectives, mean that Jamaica lacks concrete expression of solidarity that are crucial to social cohesion in any modern democracy.

16. It is the Confederation's view, that this absence of even a basic social contract has aggravated the growing informality of the Jamaican economy and the rise of aggressive individualism in the society.

C. SOLUTIONS

1. In light of the above, the Jamaica Confederation of Trade Unions calls upon the Parliament of Jamaica (Government and Opposition) to negotiate and implement a tax reform package that is efficient and equitable, a policy intended to:

(a) Correct the fiscal injustice that the Parliament has perpetuated for 350,000 PAYE citizens

(b) Stem the growing informality of our economy and temper the aggressive individualism rampant in the society.

(c) Establish a basic social contract between citizens and the state and provide the platform for agreed social protection measures for citizens, and

(d) Place the state in a position to have the revenue and the ability to provide the quality public goods and services that the Jamaican citizens will value.

2. The Confederation would like to remind the Parliament that deve-lopment is no longer perceived as an imaginary line which some nations are lagging behind. It is now perceived that all nations are on the same line. Development is more than just the accumulation of capital and the reduction of inefficiencies in the economy. It is the transformation of a society, a departure from traditional ways of doing things and traditional modes of thinking.

3. Parliament can correct an economic inefficiency and transform the society by putting in place an efficient/equitable tax system and seeking to secure national consensus on a social covenant between the government of Jamaica and its citizens.

Lloyd Goodleigh is the general secretary of the Jamaica Confederation of Trade Unions.

A section of the crowd inside the Cross Roads Tax Collectorate.