The Tax System of Jamaica analyzed as a forced savings and not as a tax. If the pay as you go system is reformed into a fully-funded scheme this will also be so. In the case of the payroll taxes there is no clear relationship between the amounts paid by the employee (or his employer).28 The contributions to the National Housing Trust are reimbursable after 8 years for the employee (or fully when he retires) and after 26 years for the employer. But as the interest rate is lower than the market rate there is an implicit tax. If the market rate is 15% per year the taxes (measured in present value) are 0.8% for the employee and 2.5% for the employer, while at 20% interest they raise to 1% and to 2.85% respectively. The HEART tax that finances a training program to develop employment opportunities for trainees is clearly a tax because the probability of receiving a benefit have no connection with the amounts paid by each worker. The same happens with the Education tax. Therefore, excluding Social Security Contributions there is a tax wedge of 12%, which is not high compared with other countries. However, taxing labor in a country where unemployment is so high is a bad decision. On the one hand, because it affects negatively more labor intensive activities which will face a higher impact on the price to the consumer because of the higher share of labor in the total cost of production. On the other hand, because it encourages firms in all activities to use technologies that save in labor. This bias is reinforced by the tax incentives on investment analyzed above. It is a paradox that in a high unemployment environment the Tax Code penalizes the use of labor by introducing some special taxes and, at the same time, subsidizes the use of capital through generous tax breaks. Taxes on labor are also a bad policy when informality is pervasive in the labor market. The productivity of labor in formal activities will need to be at least 12% higher than in informal competing activities to offset the difference in the cost of labor that evasion will create. The allocation of labor to more efficient activities would be encouraged if government revenues were obtained from consumption taxes that tend to fall in a more balanced way between formal and informal workers.29
2.3.3
Taxes on consumption
The General Consumption Tax (GCT) The GCT is a value added tax on goods and services at a general rate of 15%. It is generally acknowledged that a VAT at a uniform rate is the best way to tax consumption. In theory, a more efficient indirect taxation can be obtained by following the so-called “Ramsey
28
In small open economies like Jamaica the burden of labor taxation likely falls on workers because capital mobility makes impossible to shift the burden to capital owners and tradeable sectors have no room to transfer part or all their higher costs to buyers in the rest of the world.
29
If the effect on wealth owners is left aside a tax on wage income is equivalent to a consumption tax.
28