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Jamaica’s Finance Minister, Dr. Peter Phillips, has done something rare in Jamaica: he’s managed to get a lot of people to agree on something.

Dr. Peter Phillips thinking back to easier days, when he was a dreadlocked Jamaican, not a deadlocked one?

Dr. Peter Phillips thinking back to easier days, when he was a dreadlocked Jamaican, not a deadlocked one?

Unfortunately, for him, they tend to agree that the bank transaction tax he’s proposing is not a good thing. Many civil society groups have formally commented unfavourably on the proposal. We need to see how the conversations go in coming days, including as the Opposition make their budget responses. But, the Minister also gives us an opportunity to think about some basic elements of economic policy.

Some people have applauded the Minister’s choice of taxing bank transactions because it’s almost universal (at least for all those who are using the banking system), simple, and easy to collect.

Why do governments impose taxes? In a simple sense, taxes are mainly used to finance government expenses. But, taxes can be used to modify social behaviour. They can discourage ‘bad’ behaviour, eg polluting, consuming goods or services that governments think are bad for citizens, but which tend to be consumed notwithstanding that, e.g. a tax on cigarettes or on some or all alcoholic beverages. Taxes can also be used to protect local and infant industries, by taxing imports. Taxes also allow governments to try to achieve greater equality of wealth and income. To improve the balance of payments by increasing the duties charged on imported goods. To control spending in an economy.

Dr. Phillips has not explained what is his reasoning behind the new tax proposal, but we know that the budget had a hole of J$6.7 billion to fill and the other taxes imposed still left a gap of J$2.3 billion. Naturally, if a finance minister can find an almost dead cert for a tax then he’d have to be quite wanton to ignore it. But, taxes will have other effects once they are in operation, so some of the other effects that could be behind a tax measure can still come into play.

The bank tax will have some impact on social behaviour, not necessarily in terms of goods and services bought, but in how people go about their transactions. Economic agents will try to find ways the make the fewest withdrawals possible for any set of expected transactions. At its simplest, people may withdraw cash in a lump sum and then use that for transactions, trying to steer as much as possible outside the banking system. In other ways, those who can, will resist putting their incomes into banks so that they do not have to incur costs from withdrawing it again. In economics terms, people and businesses will tend to disintermediate from the financial sector. This will have another effect, longer term, in that the ability to use the banking system’s operations as part of the government’s monetary policies will start to diminish. That may, at least, complicate matters for the government and central bank later down the road.

Jamaica already has a low saving rate, and this wont help, at least in terms of money kept in banks. People are already sizing up their mattresses as a place to keep their money. Is this really the future that the Jamaican government foresees for a country that is supposedly primed to start growing after decades of stagnation?

Because both businesses and persons will be affected by the bank tax, we will need to see how each arranges its affairs. It’s quite feasible, that once domestic enterprises have figured out what the costs are and how it may affect their profitability, they may be inclined to move away from financial transactions with each other, but trade through barter. This may not be simple, but necessity is the mother of invention. Companies can easily find out the value of their goods in terms of other products, so rather than letting money remain the medium of exchange, companies may see if they can exchange products, 100 tins of ackee for 500 boxes of paper clips. There may be accounting issues to resolve, but to the extent that no legal constraints exist, barter may well be the order of the day for some, if not most enterprises. That may be good, in that brokering of barter deals may be new work in the economy.

Persons could do the same, but maybe without the same ease. Self-employed persons would be better placed, and more so vis-à-vis enterprises rather than other persons: one lawn cutting for 10 tins of orange juice, let’s say.

Dr. Damien King, a UWI professor of economics has spoken about how the bank tax is ‘progressive’: it affects the wealthier segments of society and those who are banked, versus those who have lower incomes and are unbanked. Well, I wont argue that. He has also talked about the efficiency and effectiveness of the bank tax, and its ease of collection. I see that, too, but that is not a good reason enough for a tax. If it were, we’d have governments devising ways in which tax could be assessed and collected for almost everything. We could get a compnay to devise a breathing monitor and levy an ‘inhalation tax’, and set up systems that forced all persons to have bank accounts and tag the ‘inhaler’ to their accounts and get automatic payments to the Treasury.

The government has also done something that I see as perverse. Over the years, citizens have been encouraged to make changes in their financial behaviour, notably to use banks more (for receiving pay and making payments). Having complied to a large degree, the government can now use this more-banked society to impose a near-unavoidable tax. Well, try to get people to change other behaviours and see whether the suspicion exists that this will be the first step toward penalising those who have agreed to the new way of doing business.

Former contractor general Greg Christie says the impending tax on withdrawals from deposit-taking institutions sends the wrong signal to foreign investors. He sees tax moves like putting a levy on banking withdrawals as signalling high risk for investor.

Finally, for now, the proposed tax sends a bad message regarding tax evasion.

Tax evaders in Jamaica have an easy time. (Courtesy of The Gleaner.)

Tax evaders in Jamaica have an easy time. (Courtesy of The Gleaner.)

The government has more than enough revenue due but unpaid to cover its residual gap, but seems to have no intention of going after those payments. If that seems to be the approach, then what is to stop economic agents taking the calculated risk of not paying other taxes, given that the government seems less concerned about arrears.

The US financial sector is sharpening its swords for a battle with the Obama Administration over a possible bank tax. In that case, its aim is to recoup expenses incurred in taxpayer bail-outs of financial institutions.

Perhaps, the Minister and his band of advisers have thought through the tax measure and see no problems ahead. Somehow, I think they have a few surprises lurking ahead for them.

Jamaican governments have a low rating for credibility and this new measure does not enhance that reputation. Dr. Phillips has gone the hakuna matata route, looking for low-hanging fruit. Many would love to see either that banks profits were taxed directly. Others would love to see the government making real sacrifices. As someone pointed out, if government officials are allocated J$50,000 a month for cell phone calls, could that not be reduced, to say $10,000? Jeepers, many can survive on much less, why must the public pay for what seems like excessive usage? Without tackling the other side of the ledger well, the government again gives the impression that it is not ready to suffer along with the rest of us.