Minimum wage hike will hurt Growth

Dr. Peter Phillips – former Minister of Finance

Dr. Peter Phillips, leader of Jamaica’s opposition party, was on to a good thing when he proposed lowering the GCT rate to help those less privileged in the Jamaican society. But he has completely missed the mark with the proposal that sharp hike in minimum wages will spur economic growth.
Phillips should revisit the tax matter and back off from what would be an ill-advised huge hike in the minimum wage that would lead to many minimum income earners losing their jobs. The evidence is there to prove it. Study the details on Jamaica’s employment numbers and the proof will be very clear.
Between 2008 and 2017, the Jamaican government increased taxes sharply to close the fiscal deficit and thus reduced disposable income significantly, which led to lower consumption. The cuts also led to a decline in productivity as businesses had to absorb higher unit costs per output as sales contracted. With the economy growing for the past five years, tax intake has been much higher in each year from the 2017 fiscal year. It is time we return some of the taxes imposed during the years of austerity back to the people.
What is needed is not just an arbitrary cut in one tax or the other, but a proper assessment of those that are inhibiting production. Yes, GCT should probably be reduced to 15 percent, which could well result in increased inflows as the lower tax rate would lead to increased consumption and less leakage.
Corporate taxes need to be reformed. Businesses and their owners should pay one rate based on profits. The tax rate on businesses should be around 20-25 percent with no taxes on dividends. As such, shareholders would pay taxes on profit once not twice, with the latter being the case. All asset taxes that drive up borrowing costs must be removed and thereby reduce the distortion in the system. Payroll tax credits must be eliminated; they are a wasteful use of the country’s taxes. The excessive tax on financial institutions must also be eliminated as they are taxes on the end users, not the financial institutions, and they drive up the cost of production.
On close examination, there are several other categories of taxes that should be removed as they bring in relatively a small portion of the country tax revenues, leaving around ten in all. This would reduce government’s operating cost for tax collection. Small businesses are burdened with all sorts of tax compliance issues and need relief from them so that they can focus on running their businesses and earning a decent income for their owners.
The above are some of the tax proposals that Phillips and his team should be addressing as reforming them could push economic growth. Hiking the minimum wage sharply will not only hurt economic growth, but it will also surely lead to reduced employment.
Contrary to Danny Roberts’ comments a few years ago that raising the minimum wage does not cut jobs, the data clearly shows the opposite. The category of workers most vulnerable to job losses, based on increased minimum wages, are those in private households, who suffered major declines in employment as the minimum wage rose above the country’s overall earnings. In fact, between 2003 and 2009, the minimum wage was increased 35 percent faster than the country’s average earnings and had a telling effect on employment in the sector. Employment in private households peaked at 74,200 in April 2004 and went downhill, hitting 56,000 in 2010 ―a loss of 16,000 jobs or a 22 percent decline. The proposed increase in minimum wages by Phillips is likely to lead to a 30 percent or more cut in jobs at that level.
Unlike many sectors that began to shed jobs with the advent of the global crisis, household employment started to fall off from 2004, making some recovery in 2006 and 2007 and continued to decline, reaching a low of 51,400 in the summer of 2009.

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