Create new industries to fuel growth

Tuesday, March 20, 2012

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Over the course of the next few weeks, the Parliamentary tax committee will have the awesome responsibility of weighing dozens of written submissions and oral presentations. It is an awesome responsibility because — for a small, open, developing country with a weak corporate sector, coupled with declining productivity and competitiveness — tax policy is the single biggest factor in differentiating Jamaica from over 100 similar countries, all desperately seeking foreign investment.

This assumes a degree of financial stability. By now it is well understood that Jamaica's high debt — and more importantly, debt service — is likely to require increased revenues to close a new IMF deal. Indeed, in his Parliamentary submission for the Private Sector Working Group on Tax Reform, Mr Joseph Matalon eloquently noted the risks if we failed to achieve an IMF agreement, including a deterioration in business and consumer confidence leading to an inability to service our debts and a steep fall in the Jamaican dollar.

Probably the most shocking, almost unbelievable, statistics in his presentation was that of 60,000 registered companies, only 6,000 filed a tax return, and only 3,000 actually paid tax. Broadening the tax base is crucial to solving Jamaica's fiscal woes. But the true significance of this appears to have missed most commentators.

The non-payment of taxes, important as it may be, is secondary to the terrible lack of net new business creation revealed by these statistics. The total number of registered businesses has not changed much in decades. More important still would be the number of active businesses (after inactive or related companies have been eliminated) over the period.

We don't have that figure, but it is our strong guess that it has remained stagnant or perhaps even fallen over the past two decades. Even at the abysmally low rate of compliance we now have, more businesses would mean more tax returns and more cash for Inland Revenue.

Recent US research suggests that the greatest area of scarcity in new business creation is not new ideas or innovation, but entrepreneurship. Over the past several decades in Jamaica, there have been few true entrepreneurs, people who go into business because they see a global demand that they can meet, rather than those who set out on their own because they find it difficult to get a job from anyone else.

In the context of our small island, which has seen decades of little or no growth, the entrepreneurs we most need are those with the ability to create local jobs by selling to the world, rather than those fighting over a small, stagnant domestic market.

Another way of looking at the problem of entrepreneurship is, can citizens create jobs or do they need jobs to be created for them? It is this absence of new industry creation that is the real underlying cause of Jamaica's lack of tax revenue.

Tax reform must be carefully structured to encourage such entrepreneurs of opportunity, while not hindering entrepreneurs of necessity, as only through job creation can we create sustainable improvements in tax revenue and people's lives.




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