ISP Working Paper Number 04-33

Taxation and Economic Efficiency in Jamaica

Miles K. Light, December 2004

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Abstract:

This report presents a quantitative economic model used to determine the macroeconomic impact of tax reforms in Jamaica. We identify the magnitude and nature of changes to production, trade, and consumer welfare related to raising additional government funds. The current results suggest that simply increasing rates under the existing tax structure will produce a low tax yield and high efficiency costs. Although the Jamaican people are impacted in any scenario, the tax burden can be mitigated by improving tax compliance and by eliminating several pre-existing tax distortions. For example, the welfare cost of funds related to GCT taxation can be reduced by 50% by moving to a fully-uniform rate structure. Import tariffs could be improved by 12.5%. If Jamaican labor supply is elastic, as it seems to be, then labor taxation is inefficient. Conversely, labor taxes may be relatively efficient if supply elasticity is low, but the incidence is is then borne mostly by workers. The aggregate welfare effects and tax collections of a comprehensive tax package will depend upon the magnitude of each tax change and the final rate structure. This report identifies why some tax streams are more or less efficient, and why they may collect more or les tax revenues. AS an economic research report, several institutional and legal conditions known to exist in Jamaica are ignored here. Ultimately, tax collections and their effect upon the Jamaican population will depend upon economic forces as well as institutional conditions.