DAMION CRAWFORD EXPLAINS SHAW’S TAX PLAN

Audley for the win
After reading Audley Shaw’s presentation to parliament, it confirmed one of my greatest fears: I have become one of “them”. Not that I have become a member of the JLP, but instead, I have become one of those persons who starts with the conclusion, “It cannot work.”
When I heard the announcement of the JA $1.5 million plan, my first reaction was, “This cannot work” – which is unfortunate because it is likely to have been a plan I celebrated if it was announced by the PNP. Therefore, I needed that proverbial slap in the face when Mr. Shaw quoted, “What the mind can conceive and believe, it will achieve.”
To this extent, I am now focused on how it can work best and not that it cannot work. Not to be too hard on myself, in a December 2015 PNP broadcast, I stated that it could only work if consumption taxes were imposed, which would have affected those not employed or not employable (children, extreme disabled, retired, etc.). However, that too was short-sighted. My next question should have been, “How can it be done without increasing consumption taxes?”
Having read Mr. Shaw’s presentation, my conclusion is: Great mind-set, but poor thinking. The great mind-set comes as a result of the fact that workers do need and should be given a break, but it is poor thinking that the same workers shouldn’t be broken to get said break.
However, before I give my recommendations on how the JA $1.5 million threshold should be implemented, I wish to address some misconceptions engined by deliberate miscommunication. After all, fact is the mother of truthful analysis.

The JLP has Delivered on its 1.5 Million Dollars Promise – Not True
During the elections the JLP’s 1.5 million dollar promises had three (3) components namely an amount, a group and a time frame. The JLP suggested that the threshold would be moved to $1.5 million dollars for those earning less than $1.5 million on April 1st 2016.
Time component: As we all know, the suggested timeframe of April 1, 2016 has been missed, but also of import, the counter-promise of making it retroactive to April 1, 2016 has been broken.
Amount component: To date, the tax threshold has not been carried to JA$1.5 million dollars, instead the JLP has made a new promise of taking the threshold to JA$1.5 million in April 2017. Let’s use this analogy: A man borrowed your money and promised to make the repayment in one week. Shortly thereafter, he came with a sad story that he cannot repay on the due date as promised. He instead makes a new promise to repay three months later. We will not major in the minor about the new date but we would definitely not be satisfied until the new date arrives and the money is paid. So let us accept that regarding the amount component, the promise has not been kept.
The Group: Here, the JLP has improved on their promise. Not only are the workers earning under JA$1.5 million getting an increase in the threshold, but all workers are getting an increase in the threshold. While it is not the JA $1.5 million initially promised, those earning over JA$1.5 million were promised nothing and are getting something.

The JLP has increased the tax threshold to JA$1 million for all workers for the financial year 2016/2017 – Not True
Since the plan is not retroactive to April 1st, the JLP has effectively increased the tax threshold to JA$898,197. Let’s take a look: The monthly tax threshold would be $83,333 (1,000,000/12) because it’s not retroactive to April 1st. The worker therefore does not receive the addition break for the months of April, May or June, but receives the additional for July 2016 to March 2017 (9 months). For those 9 months therefore the total threshold is $749,997 (83,333 x 9). However, we received the original monthly threshold of $49,400 (592,800/12) for the three months prior. The worker would therefore receive $148,200 ($49,400 x 3) for the first three months and $749,997 for the next 9 months totalling $898,197 for the year ($148,200+$749,997). It is therefore not true that the current threshold is JA$1 million but instead it is $898,197.

The JLP has given workers a $1 million break- Not True
As highlighted above, the actual tax threshold for 2016/2017 is $898,197. However, this is not a tax break. Let’s go further with the analysis. The worker already had $592,800 so in effect the worker has received $305,397 more in untaxed income, which will result in up to JA$6,362 more in tax breaks per month (305,397x.25)/12). This suggests that instead of up to $18,000 per month more in their pockets as of April 1st – as was promised on the campaign trail – for the year ending March 31, 2017, the worker will have up to $6,362 more. At maximum therefore, the JLP has delivered approximately one third of the promise.

Below I have placed a table showing the likely increase for seven (7) differing categories of Jamaican citizens. These include:
1. Unemployable: These are persons not of working age as well as those with extreme disabilities. It includes children, retirees, etc.
2. Unemployed: Persons of working age but currently out of a job
3. Earning under $50,000 per month: This includes minimum wage workers, as well as a host of other workers in Jamaica
4. Earning $60,000 per month
5. Earning $70,000 per month
6. Earning $80,000 per month
7. Earning over $80,000 per month

Monthly Income
Yearly Income
Monthly increase in Take home
Daily Increase in take home
Unemployable
zero
zero
zero
Unemployable
zero
zero
zero
Under $50,000
Under $600,000
zero
zero
$60,000
$720,000
$2,650
$88
$70,000
$840,000
$5,150
$171.66
$80,000
$960,000
$6,362
$212
Over $80,000
Over $960,000
$6,362
$212

I must add here, that as a man who pounded the table in 2015 when Dr. Phillips announced a threshold increase of $50,000, I cannot help but to wildly celebrate a $300,000 in non-taxable income. It is however important that Jamaicans don’t believe that they will be getting $300,000 more to take home per year, but instead the 25% the government formerly took from this $300,000 will no longer be taken. Therefore, the worker will go home with a maximum of $75,000 more per year, maximum $6,250 per month or maximum $212 per day (plus or minus $5 for calculation rounding).

The JLP proposal impacts 252,000 PAYE workers-Not True
If one stretches the imagination this could be true. Currently 252,000 PAYE workers are below the tax threshold, however, 179,000 of this 252,000 were already below the tax threshold and have received no further benefit from the announcement. The JLP’s announcement has therefore impacted 74,000 workers and not 252,000 workers. I must repeat here however, that all things constant, I am glad for those 74,000 workers of which I am a part.

100% Increase In SCT On Petrol Will Have No Impact –Not True
The 100% increase on the consumption of petrol is in fact inflationary. Mr. Shaw, himself, on page 3 of his speech admits that inflation last year was at 3%. He goes further on page 6 of the same speech to say one of his main assumptions for this year is an inflation of 5.5%. So Mr. Shaw, himself, believes there will be higher inflation (almost double what it was last year). Pairing this with his commitment to control the slide of the dollar (plus the dollar’s slide hasn’t proven to be inflationary in the last 3 years) as well as his further assumption on page 6 that oil prices will remain low, the likely cause for the assumed inflation is the tax package.
However, let us look at the SCT in particular. Even if it does not lead to a sustained increase in general prices (inflation), it will lead to increases in transportation cost. Already, we are hearing the taxi drivers requesting a 50% increase and if JUTC wants to make no further losses it too will have to pass on the SCT. For the purpose of furthering this explanation, let’s use the assumption that the taxi drivers receive the requested 50% increase where the average fare is (currently) $100. Assuming that the average person takes two vehicles from home to their destination (I went from home to downtown, Kington then downtown, Kingston to Kingston College) then the cost of transportation would increase from $200 each way to $300 each way, or more simply put from $400 per day to $600 per day. Below is a table showing the impact.

Monthly Income
Daily Increase in Take Home
Daily Impact Based on Threshold Increase Minus SCT Impact
Yearly Impact Based on Threshold Increase Minus SCT Impact
Unemployable
zero
$160 worse off
$48,000 worse off
Unemployed
zero
$100 worse off
$30,000 worse off
Under $50,000
zero
$ 200 worse off
$60,000 worse off
$60,000
$88
$ 112 worse off
$33,600 worse off
$70,000
$171.66
$29 worse off
$8,700 worse off
$80,000
$212
$12 better off
$3,600 better off
Over $80,000
$212
$12 better off
$3,600 better off

The above table uses children to represent the unemployable, suggesting they go to school and the increase of $160 was used knowing that children pay a lower fare. The table also assumes that the unemployed travel much less than the employed and therefore averages the changes at half the employed. Finally, the table assumes an individual does not travel every day and therefore used 300 days to calculate yearly impact.
Added to its impact on the cost of transporting people, the SCT on petrol also impacts the cost of transporting goods. The historical evidence shows that there is almost a one-to-one transfer of these costs to consumers and I have not heard or seen any reason for that to change, to date. Assuming a continuation of the historical precedent of the one-to-one transfer of cost to customers, while acknowledging that goods are transported generally in bulk, the inflationary impact here will not be dramatic. It is not however unreasonable to assume that the average cost per meal might increase by $3 or one percent. Assuming the consumption of three meals per day as is recommended, this would lead to an increase in cost of $9 per day, equivalent to $3,285 per year. In the table below I show the impact of combination of transport cost plus likely food cost when subtracted from increase in take home pay.
Monthly Income
Daily Increase in take home
Yearly Impact Based on Pay Increase Minus Transportation Impact
Yearly Impact Based on Transportation and Food Cost Impact
Unemployable
zero
$48,000 worse off
$51,285 worse off
Unemployed
zero
$30,000 worse off
$33,285 worse off
Under $50,000
zero
$60,000 worse off
$63,285 worse off
$60,000
$88
$33,600 worse off
$36, 885 worse off
$70,000
$171.66
$8,700 worse off
$11,985 worse off
$80,000
$212
$3,600 better off
$315 better off
Over $80,000
$212
$3,600 better off
$315 better off

Proposals
1. Increase Tax on Dividend to 25% and Leave Income Tax for all at 25%.
I sense some inequity in the increase to 30% tax on income earners over $6,000,000. Let us look at the new reality where a man earning $6 million in wages pays 30% of revenue before expenses, while the company he works for pays 25% tax on profit which is revenue minus expenses. Put more simply, the working man earning six million in wages pays 30% in taxes before he pays for rent, etc. while the multibillion dollar company pays 25% in taxes after paying rent, etc. Something about this sounds unfair to me. Let us look further: The man earning $6 million pays 30% in taxes on his wages but the man earning $6 million from investments pays 15% on his dividends.
“Why is this so?” I ask myself. Why is the worker being shafted? Is it because all the JLP “influencers” earn dividend and not wages? Is it because they all seem to earn profit and not wages? (Think on these things!)
2. Additional SIN Taxes on Alcohol to Raise 1 billion in Taxes.
3. $3 cess on Foreign Exchange Purchase: (net $21 billion).
It is assumed that 80% of global foreign exchange trading is due to speculation. In 2011, it was reported that four trillion dollars of foreign exchange trading took place per day while only nine trillion dollars per year was needed for the trade of goods and services. The proposed cess of JA$3 for every unit of foreign exchange bought with Jamaican dollars, will not apply to oil imports or manufacturing inputs. Manufacturers in particular will be able to write off foreign exchange costs against GCT collected monthly. This action also has the benefit of deterring speculation and encouraging local consumption. I can hear the detractors claiming the automatic evolution of the black market, but this is unlikely because of the level of trading that takes place in Jamaica. I also disagree with the argument that it will be inflationary due to the high import bill. Unlike the petrol tax which affects all items, the foreign exchange cess only affects the imported products and not its competitors. Therefore, while the cost of transportation will be borne and passed on by all suppliers – thus having only an income effect – the fact that local goods do not bear, suggest that the substitution effect will be high if the cost is passed on to the consumer, leading to greater local consumption. In short, because the cost is not borne by all, it makes the market more elastic causing the supplier to fair better by not increasing the prices.
4. Maintain the Increase in Departure Taxes
While this calls for Jamaica to have one of the highest departure taxes in the Caribbean, the difference as a percent of the total vacation package is immaterial and shouldn’t lead to any market fall out.
5. Maintain SCT on Tobacco.
6. Remove the Increase in SCT on Gas.
As stated above it’s inflationary.
7. Remove the SCT on LNG
This should also be inflationary.
Activity
Impact on Proposed Revenue
Dividends tax increase to 25% all income 25%
Neutral
Additional Sin Tax on alcohol
1 billion
$3 cess on foreign exchange trading
21 billion
Maintain Departure tax
Neutral
Maintain SCT on tobacco
Neutral
Removal of SCT on Gas
(6.49) billion
Remove SCT on LNG etc
(1.415) billion
Net effect
Positive 14 billion

Conclusion
As is noted above, if the government applies a JA$3 cess of foreign exchange trading as well as a SIN tax on alcohol, while removing the SCT on LNG and Petrol, they will earn up to JA$14 billion more. Further, the government should remove the additional burden from the worker earning JA$6 million and replace it by increasing dividends tax to 25%. These methods I believe will allow the government to achieve the JA$1.5 million tax threshold without imposing onerous taxes, an outcome that at first I thought was impossible. The JLP had to implement some form of tax relief or they would have been politically dead. Having done so, Audley Shaw won, but truth and equity lost.