Most Caribbean countries, with the exception of Jamaica and the Dominican Republic, have small populations. Consequently, the small national market, high input and transportation costs associated with being an island often make it difficult to develop a significant industrial sector. The small economic bases of these countries are crucial bearing in mind that for governments reduction of unemployment has to be a primary goal. This unemployment situation in the Caribbean countries increases the potential significance of tourism when compared to other sectors that are not visible on a large scale.
There is a great challenge within the independent Caribbean to support the full machinery of government. Most governments are burdened with huge expenditures that are becoming increasingly difficult to reduce, with decisions having to be made with respect to fiscal policies that address the situation. Most of the governments turn to the leading sectors, and in the Caribbean region this is often tourism. However, there is now a threat that tourism can become over-taxed due to growing debt and an over-reliance on a single sector!
But in this haste the fiscal policies of most of the administrations to date fail to energize key sectors which can stimulate employment. A redefined fiscal policy can lead us away from depending solely on the tourism sector which, by the way, we are also starting to over-tax.
Few administrations, whether United Workers Party or the Saint Lucia Labour Party, have appreciated one simple fact of economics: Taxes discourage production! The increases in direct and indirect taxation over the last fifteen years are now a clear and present danger for our small vulnerable economy. The recent reduction in VAT is a first step but, parallel to this step, the government must review its present personal income tax policies. If we truly want to see the economy start to breathe and show signs of expanding, we need to place disposable income in the hands of our country’s hard-working taxpayers. Removing Pay As You Earn taxes on income up to $6,000 a month, and applying a flat 10% on any income above $6,000, will put money in circulation in our comatose economy. The money which would be paid as monthly taxes will be saved as capital—to be invested or spent on consumption within the economy. Taxpayers presently are taxed out; therefore there is no money circulating in the economy: consumers are not spending at our restaurants, cafes, clothing stores, electronic outlets, malls and so on. If the public has no money to spend, then the consequence is a slow death for the economy.
Once the change is done, top personal income taxes is done, the Inland Revenue Department will be freed up to concentrate on arrears of corporate taxes, arrears of land tax and the arrears of income tax. The present tax regime cannot get optimum efficiency from the Inland Revenue Department. More money in the hands of workers will encourage more spending in the local economy and, by extension, the private sector will have breathing room and be able to expand, employ, and be more efficient in production. It is without doubt that the monies being collected by government via PAYE will be better spent with the local economy and will show quicker real-time results. Monies spent in the economy from this tax relief will benefit the local agriculture sector via a buy-local campaign for national produce, and boost the local manufacturing sector. Both of these sectors need to show expansion and growth!
A certain amount of taxes is required to carry essential government services and projects. But these taxes should be reasonable and not hurt or stifle production expansion within the private sector. The larger the percentage of national income taken by taxes, the greater the deterrent to private production and employment. When the total tax burden grows beyond a tolerable size, the problem of devising taxes that will not discourage production is further exacerbated, if not altogether irresolvable. When VAT was introduced, I fully expected a review of personal income tax policy. VAT taxes a large base, true, but to keep the two working parallel will have deadly consequences on the economy. Without an influx of new persons participating in our economy; without new projects and investment of cash circulating in real estate, retail and manufacturing, this economy will die a slow death. Look around; we are already at that point. If we are not very careful the one sector we depend on heavily will be the next casualty.
Remove Pay As You Earn now!
By Cuthbert Didier