The two proposals are offered in an environment in which the fiscal space is very limited. At the same  time, Jamaica is a heavily taxed country and the tax burden is considerable especially for those who  find it difficult to avoid taxes such as PAYE and other formal sector workers. 

Our research has shown that the country has a relatively high tax-to-GDP ratio, with Jamaica’s tax-to GDP ratio being at least 10 percentage points higher than the average for Latin American and Caribbean  countries between 2010 and 2020, and higher than all but three countries in the region in 2022 (Tennant  2025)1. 

The step taken by the respective political parties to revisit tax levels is a move in the right direction.  This ought to be done in a fiscally responsible manner, keeping in mind the country’s fiscal rules and  what is fiscally prudent, particularly in relation to the country’s aim to reduce the debt-to-GDP ratio to  60% by 2026/27 

The FRC is offering a very preliminary reflection on the proposals since more rigorous analysis would  require the use of microsimulation models which we are in the process of building and hopefully we  shall also have access to the requisite data. 

To evaluate the PNP’s proposal requires an understanding of how long it is anticipated to recover  revenue losses and the size of the loss. This note is based on a number of assumptions including how  many taxpayers will benefit from a permanent increase in the PIT threshold from its current level of  J$1.8 million to $J3.5 million. 

1See Sandria Tennant (2025). Recent trends in Jamaica’s Tax Revenue, Tax burden and Tax Capacity. FRC  Working paper No1.

The revenue can be recovered in several ways based on the following general equilibrium  considerations: the effects of the expansion that comes from higher domestic consumption, due to  increased spending and the import duty increase due to a high marginal propensity to import; the  productivity effects coming from incentives to work harder - these are growth effects- and the effects  from tax shifting to increase revenue. To sum up, given the labour productivity effect is likely to be  small, the recovery of revenue comes from increased import duties, increase in GCT due to higher  domestic purchases and possible expenditure reprioritization. Of course some small portion of the tax  increase could be saved or invested as well, mostly by higher income households. 

This proposal helps those at the lowest rounds of the income ladder so there are distributive effects. The time to recovery then would matter and this needs to be clarified including the total revenue  forgone in the first year and revenue growth projections. The assumption of full revenue recovery in  one fiscal year might be too restrictive. 

We computed the revenue loss based on the following. 

1. Estimates of PAYE revenue will decline due to the increased threshold level. We have no data on  the limits of income among PAYE taxpayers. 

2.The increase in GCT on domestic purchases and the effects due to increased import duties based on  the propensity to consume. 

Our estimate suggests a revenue loss of about J$47.3 billion which was reduced by revenue gains from  increased GCT and import duties. 

The proposal is unclear on the time to recovery but if revenue is to be recovered in the first year then  tax revenue would have to increase by J$185B given an overall revenue elasticity of 0.27%. Given that revenue is forecasted to increase J$1 trillion in 2025/26 there is likely to be a shortfall of  $51billion. There are other options including saving from the decline in the debt ratio, due to GDP  rebasing and saving from expenditure prioritization. The bottom line is the fiscal space remains very  tight and we suggest caution. Perhaps a more gradual increase in the threshold might be safer. 

Turing to the JLP’s proposal, this approach is more broad based and is projected as a gradual reduction  in PIT rate from 25% to 15 % over time. One can reasonably assume that this will take place over a five year period say at 2% per year all things being equal (but the JLP has a long-term approach, usually  greater than 7 years). Of course, one must remember that the threshold under the JLP is to rise to  $J2m in 2027. This is likely to be superseded by this new tax proposal. 

The assumptions for growth would be similar to that raised above however, we can compute rough  revenue losses. The PAYE tax revenue was J$146 billion in 2024 which roughly would be J$584 billion  in income. At a lower rate of 23% it would be J$134 billion which would be a revenue loss of J$12 billion roughly in the first year. The elasticity of total revenue with respect to income is about 0.27%.  An additional increase of $44B income would be required in the first year. As was pointed out before,  additional income means more consumption of domestic goods and imports and some amount will  be saved by higher income households.  

Both proposals require more detail to be properly assessed. They are likely to have a revenue gap  even given the likely impact on domestic consumption and imports plus some small labour market  effects on productivity. Only a CGE or microsimulation models, which the FRC hopes to build can be  more precise with respect to the merits of the proposals. But for now, the growth rate of the economy 

and the impact of the tax reduction on increased consumption and the debt limits would matter and  both proposal rely heavily on these assumptions. In additional, while the PNP’s proposal is  distributionally sensitive2 and the consumption impact higher given a larger propensity to consume  among low income earners, the JLP’s proposal though neutral in this respect, will likely impact savings  and investment more. 

 

 By Dillon Alleyne 

 Professor of Applied Economics 

 Director FRC