Arguments for a cut in GCT: Dr Haughton has unfinished business

I’m personally saddened by my fellow economist, Dr Andre Haughton, retracting quickly his remarks about the merits of his party leader’s proposal that GCT be reduced by 2 percentage points (from 16.5% to 14.5). In politics, there’s nothing wrong with offering things as ‘bait’, especially when your party is not in power and in place to (yet) deliver: you have to have something to offer voters. However, he asked the right questions, about the costs and benefits. Unfortunately, he didn’t’ answer the questions, though his tone during his senatorial presentation suggested he thought it was on balance not beneficial.

I understand his need to draw back on the manner of his utterances–not having made himself familiar with ‘stated’ party policy and not running the ideas past the party hierarchy. However, those gaffes in protocol do not matter to the argument, as the Senator noted in a subsequent radio interview. Let’s put that down to ‘youthful exuberance’ (which can cover all manner of sins).

His questions are those that should be posed of any economic policy proposal, and it’s good to have shown that such considerations have been made, whether or not one agrees with the analysis. It’s exactly what previous finance ministers and their opponents did most recently in deciding whether to give Jamaicans a tax break (you must remember the J$1.5 million income tax relief proposal): imposing lower income taxes on people is the same numerically as reducing indirect taxes on them. Now, the current government has taken a policy position to move from direct to indirect taxes, so would be less likely to like the GCT reduction idea on those grounds, whatever the perceived costs and benefits. Results since that move show much better than expected results in tax collection.

What the good doctor did not explore was what may happen with a lower tax burden on Jamaicans at this time. Who are likely to be the gainers, and how will that affect other aspects of their behaviour? The general understanding is that richer people will save, while poorer people will spend tax relief. So, what is the expected balance between saving and spending? How will people decide to spend the tax relief, and on what, and will their spending be on domestic or imported goods? Will some of the saving turn into investment in other assets now seemingly more attractive and accessible? All of this goes to whether and how far the tax cut will stimulate other activities. Some have questioned the internal consistency of the government’s growth ‘policies’ that gave income tax relief but clawed that back by raising GCT, so a reduction in the latter would help to correct that. The sluggishness of GDP growth since the current government’s tax measures were introduced tends to suggest that domestic demand has been stifled and ‘putting money back into people’s pockets’ is what’s needed, especially as tax revenues have been overperforming for a considerable time since the switch to GCT.

GCT is not imposed on all goods and services, so the reduction of the tax rate (assuming it’s across the board) will make those goods and services that attract GCT more affordable absolutely and relative to goods and services that do not attract GCT.

Simply put, there are many economic consequences we need to consider before either running with, or dispensing with, any tax change idea. No kidding, it’s not necessarily an easy exercise, but it ought to be done, and I hope that the PNP has done, or is doing, some poring over the likely outcomes.

In the meantime, I’d suggest the senator-economist do a little more probing beyond looking at the estimated J$26 billion that the national treasury may lose and his casting the gains for individuals as paltry.

Author: Dennis G Jones (aka 'The Grasshopper')

Retired International Monetary Fund economist. My blog is for organizing my ideas and thoughts about a range of topics. I was born in Jamaica, but spent 30 years being educated, living, and working in the UK. I lived in the USA for two decades, and worked and travelled abroad, extensively, throughout my careers and for pleasure. My views have a wide international perspective. Father of 3 girls. Also, married to an economist. :)

4 thoughts on “Arguments for a cut in GCT: Dr Haughton has unfinished business”

  1. I think he said it in an interview (where he sounded terribly upset) on Nationwide…that he is not in the liberal atmosphere of academia any more. He has to toe the line. He’s now a politician. He needs to understand that!

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