Payroll Taxes and Contributions in Jamaica

The Government of Jamaica imposes a variety of taxes on the earnings of workers. Some of these taxes are more properly viewed as "contributions" because individuals are entitled to benefits whose size varies with the amount of the contributions. Some may also be seen as a way to force people to save for old age, for insurance against health problems and occupational injury, or for a home. Several are a surcharge on the individual income tax (IIT), and can be seen as an additional burden on income earners, mainly Pay-As-You-Earn (PAYE) workers. One of these taxes is used to finance government-provided job training programs. In total, these various payroll taxes generate significant amounts of revenues, and constitute a significant additional burden on labor, nearly one-half the burden of the individual income tax itself. There is a widespread belief that the additional burden of the payroll programs has had a substantial range of economic effects on such things as employment, savings, and labor supply. Because of this additional burden, many also believe that these payroll taxes and contributions are escaped via evasion and avoidance in significant amounts, in part by switching labor from the formal to the informal sectors of the Jamaican economy, by switching compensation from taxed to untaxed forms, and by outright evasion.This staff paper analyzes this "system" of payroll taxes and contributions, focusing mainly on the tax and contribution side rather than on the benefit aspects of the contribution programs. The administration of each of these payroll programs is discussed, and the effects of the entire system are also analyzed. Much of the analyses is based on microsimulation models developed in the course of this tax reform project