The research body also calls for future increases to be linked to inflation
The Caribbean Policy Research Institute (CAPRI) is proposing that the Government increase the personal income tax threshold by 47 percent in the next budget cycle to help compensate for losses due to inflation since the last increase. The proposal, if accepted, will see the personal income tax threshold rising from $1.5 million per annum to $2.2 million.
The recommendation formed part of the executive director of CAPRI Dr Damien King’s presentation of the report “Budget Breakdown 2023: An Analysis of the Government’s Proposed Revenue and Expenditure” at The University of West Indies headquarters in St Andrew on Wednesday.
King’s proposal comes against the background of gains the country has made over the last decade, which have resulted in an increase in tax revenues and the reduction in the country’s debt to gross domestic product (GDP). Additionally, he pointed out that the recommendation also seeks to correct the loss in real income, due to inflation, since the $1.5-million income tax threshold was implemented in 2017.
“Coming out of this we have two recommendations — recommendations that we encourage the Government to implement with its next budget. The first one is to correct for the erosion of the income tax threshold, which has moved a segment of the population which, seven years ago, we decided to release from the tax burden and only because of inflation…they have now been brought into the income tax burden,” the CAPRI executive director stated.
“So, to compensate for that loss since 2017, we recommend using part of the fiscal dividend from falling debt levels…to raise the income tax threshold to $2.2 million,” he continued.
The second recommendation, which is to index the income tax threshold to the consumer price index (CPI), aims to ensure that incomes keep pace with the rate of inflation. The CPI measures the change in the prices of goods and services purchased in common across the economy over some time.
When looking at the impact of inflation on the non-taxable $1.5 million in income, King said that, according to CAPRI’s estimate, the value of that sum today is $1 million.
“So a third of it has been lost,” he clarified.
Based on Jamaica Observer calculations, the rate of inflation cumulatively over the last seven fiscal years — from 2016/2017 to 2022/23 — stands at 38 percent.
During that time as well, employment has grown by 11 percent, resulting in the Government seeing a “quite impressive increase in income tax revenue”, even when adjusted to inflation.
“Over the seven years since 2017, inflation erodes the real value of that $1.5 because as the prices of goods and services go up year after year, income levels follow it…without there necessarily being greater purchase power,” King observed.
He further argued that pegging the income tax threshold to the CPI on an annual basis will eliminate the cycles of adjustment the Government makes to personal income tax.
In response to the call to increase the income tax threshold, Minister of Finance and the Public Service Dr. Nigel Clarke, who was a guest panelist at the CAPRI forum Wednesday, said that while “it is something to look at”, doing so would be “a very expensive undertaking”, pointing to a 2.0 percent loss in GDP in the fiscal year 2017/2018.
“Whatever you do has to be sustainable, so it’s something that we will look at and be transparent about the cost implications and see how the cost implications could be absorbed,” the finance minister explained.
Justifying CAPRI’s proposal to the Government, King noted that the recommendation takes into consideration the structure of the economy and the fact that the tax system is unable to account for those in the informal economy.
“So in the context of the economy, income tax is an unfair tax that is paid by those who have formal sector jobs but not by those who don’t… So part of the motivation behind the proposal is to eliminate the unfairness in what is fundamentally an unfair tax,” the CAPRI executive director said.
Again, Clarke shared that while the Government agrees with CAPRI’s position in principle, it had to take into consideration the affordability of implementing such a policy and its impact on the budget.