Monday, 22 December 2014

One person's relief is another person's burden

In an article in the Jamaica Gleaner on December 19 titled "Restore Junior Market Incentives To Spur Growth", reporter Avia Collinder presents Jamaica Stock Exchange (JSE) head Marlene Street Forrest's views on the need to retain the tax incentives offered to companies that list with the JSE Junior Market.

Street Forrest says “the Junior Market incentive drives small and medium-size companies to list”. The question I would like answered is, what benefit is derived by the economy as a whole from these companies receiving preferential treatment? If the Junior Market fails to attract listings purely because of the withdrawal of the tax incentive, then doesn’t that raise the question of what benefit listed companies enjoy, other than the tax incentive?

It seems to me that’s the question that the JSE should be seeking to answer. If the only way I could get a new customer to buy insurance was by giving away a tank of gas, I really, really need to re-examine the value of the product I’m selling.

Street Forrest’s argument as presented in the report rests almost solely on the basis of examples of listed companies that have had good results, or increased productive capacity. This is a specious argument, because:

  • This is likely to be a biased sample. Only well-managed companies (whom we expect to out-perform their competition anyway) are likely to qualify to list. It does not follow that listing causes better performance.
  • Even if listing does lead to better performance, you need to isolate and discount the benefit derived from the tax incentive, otherwise you have proved nothing about the benefit of listing other than the incentive.
  • Rather than hand-selected anecdotes, I would like to see an economist’s quantitative analysis of the relative performance of listing versus remaining private, alongside a qualitative assessment of the non-tax related benefits (and let's not forget to account for the costs that result from non-incentivised companies having a higher tax rate to pay for the fortunate few).
Every tax incentive that is applied selectively has the potential to give advantage to one group at the expense of another. Governments should only consider such arrangements when an overwhelming case can be made that the result is a significantly positive effect for the economy as a whole, and not just for the advantaged group.
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