Teodora Vallone
AS BUDGET time approaches, all eyes will be on Treasury and Resources minister Charles Parkinson to see what new measures might be necessary to enable Guernsey to balance its books and meet a growing capital expenditure programme.
In particular, will there be increases in indirect taxation? Up to now, increases in TRP for domestic residences have been minimal.
And as far as a goods and services tax is concerned, the public pronouncements are clear - not unless absolutely necessary and certainly not until after the second-stage review of the zero-10 strategy, which is due in 2011/12.
But what if the spectre of a GST is a possibility at some point? Guernsey, like many other jurisdictions, has traditionally relied on a direct tax system to raise revenue.
To preserve its competitiveness, Guernsey introduced the zero-10 regime and we are all too familiar with the outcome - while reducing some of the tax burden on businesses, it has created a black hole that needs to be filled.
Raising the personal income tax rate is unlikely to be the most appropriate solution as this could have a distortive impact on the general economy by affecting the level of spending and discouraging savings.
One alternative, based on the example of other countries, not least Jersey, could be the introduction of a broad-based indirect tax on consumption, such as GST or VAT, which would distribute the tax burden evenly and ensure a steady flow of revenue.
As Jersey’s experience has shown, introducing GST would not be a painless process. Businesses would have to adapt their accounting systems to account for the new tax and their compliance processes would have to respond to the requirements of the law - at a cost.
Consumers are not likely to welcome additional indirect tax either. In the current climate, with the housing market slowing down as a result of the credit crunch and confidence low, as it is elsewhere, consumers are aware that if GST is introduced, they will suffer the increased prices.
While the purpose of introducing GST or VAT would be to raise revenue, any such tax should be designed with regard to the island’s social context.
The upside of some form of sales tax is that, unlike direct tax, it would not push taxpayers into higher tax brackets. Therefore, the incentive to work harder would be preserved, encouraging savings, investments and entrepreneurship and proving to be beneficial to the whole economy in the long term.
The introduction of GST might also help to sustain the current corporate and personal tax rate regimes, keeping Guernsey an attractive place to do business.
However, its introduction would need to involve some considerable educational initiatives by the tax authorities.
Without an adequate educational process, there is a danger of hostility from consumers that could undermine the system even before it started. Jersey, and before that the UK, have both found this to be an issue.
With regard to businesses, the cost of compliance would need to be kept to a minimum by introducing efficient reporting requirements and administrative procedures.
Should GST be introduced, the tax authorities will need to be consistent in offering guidance as to the interpretation and application of the law.
Consistency between the primary and secondary source of law would be paramount to minimise any disputes that could affect the efficiency of the administration of the tax.
While a GST is not expected, Deputy Parkinson’s Budget report, an effective communication strategy, will be key in gaining the acceptance of any new measures from the business community and the general public.
Full coverage of the Budget will be in Friday’s Guernsey Press
Article posted on 5th November, 2008 - 2.30pm
9 Article Comments
Rather than looking at the taxayer to bail out the incompetent mess that this island is leading towards. Why can’t we make the most from our tidal race. I am very confident that this would sort out our finances as well as turning a lot of nations green with envy at our green credentials. We have a lot but are too short sighted to see or use it to our advantage.
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Its amazing the number of foreign staff the big four accountancy firms are employing here and in Jersey these days, dwarfing the number of locals and people from the mainland. Some sort of import tax on their entry might address the fiscal deficit.
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Paul,
I agree with your comments about making the most of our tidal race.
However, GST or VAT equivalent cannot be put off forever.
In Jersey those who put the political careers on the line on bringing in indirect taxes, have been voted back in.
No one likes the idea of additional taxes, but how else are we going to balance the books because we don’t want to cut any of valued services. The Isle of Man receives most of its income from VAT and the reality is that it is a fair tax. There are many wealthy people in Guernsey not paying tax and they can’t avoid contributions with GST/VAT.
It is well overdue to end the tax loophole of the sale of properties by share transfer, and that is one of many other examples of where we can have a fairer system and improve our income.
Paul Revere, you are right in what you say, and maybe in Guernsey we should more insist on open market properties being used rather than granting licences.
However, I have no objection to Teodora Vallone’s comments and sometimes it is beneficial to listen to the perspective of someone who might have global experience.
Tony Webber
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GST is of course an option. Another less costly option would be an increase in direct income tax (coupled with an increase in personal allowance to ensure that low-income families aren’t unfairly burdened). Even a small increase of perhaps 1p or 2p in the £ would raise significant revenue without the extra costs introducing GST would have on businesses (that would be passed on to the consumer).
I think many responsible islanders would be happy to exchange slightly higher taxes for better public services like education and healthcare. Of course that would mean wise spending by the States, but that is another debate entirely! ;-)
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Paul Le P
I agree with the sentiment, however, do you think that the responsible Guernseyperson is someone that is based here to mitigate tax expense by using company incorporation and all those accounting tricks that the States are facilitating, or the person that is grafting for below average pay and worse year on year rises?
Only by strict legislation on higher earners (I read a decent government paper on those that are exploiting domicile rules - a good step), introducing some sort of wealth tax, be it IHT and its ilk, or tax on calculated market wealth (this would encompass rising house prices and share price rises and the like) will any sort of progress be made to make people feel responsible for the island. The problem is that people that come over here to run the businesses we need to ensure that we can continue to enjoy the successes of the last couple of decades are using the same tax mitigation processes afforded to non domiciles. It’s easy peasy to incorporate a company and then have income dealt with as capital. etc etc
What must not happen is that Guernsey turns into some sort of ‘playground’ for the rich. It will be at the expense of the local person. Our politicians should be serving the electorate, the majority of which are not directly served by these loopholes and expediences. GST, unless punitive on luxury items, is not a fair tax.
You’ll probably find that most people buy their stuff online anyway, except for milk and bread and staples, because of the crazy overheads created by money grabbing landlords and the like.
Raise income tax, raise the relief threshold, introduce a higher band, and tax wealth.
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I think that a lot of people are missing the main point here. We have lots. So much more than most. What we do have is perpetual and needs to be harnessed but let us all keep feeling negative with a solution off the top of our heads in relation to our current problems. Maybe we will realise this asset when it is too late to make the best of it? RIGHT? WRONG ACTUALLY. If we can all start concentrating on our positives rather that focuseing on our negatives then, in my opinion, this would be a starting point? Our initial cost will be high but we will be a role model to all and sundry and maybe we will start competing on a green global level. An industry which nobody can have any gripes with?
It is my opinion that we will run our planet into meltdown before we realise this fact?
For what exactly?
Personal GREED?
I have a family which I wish to grow upon do we all?
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A cautionary tale from across the pond that has considerable relevance here at this time. T & R beware.
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes, so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share”? They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink their beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now paid $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before and the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than me!”
“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up. The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start
drinking overseas where the atmosphere is somewhat friendlier.
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Brian V
Excellent ‘beer’ post
Do us all a favour and repeat it every time an anti rich tax matter is raised in these pages
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Brian Veillard
Only in America could they trivialise social responsibility with drinking beer.
Why is the tenth man so rich anyway? Did he make his wealth by profiteering, usually at the expense of cheap labour? Did he use more than one person’s fair share of natural resources and public infrastructure?
Anyway, the idea that the poor beat up the rich is conceptually flawed. The problem is that the entire system is at fault. Tax strategies are fighting the inherent wealth disparities, a process that evolved with the use of wealth as power to subjugate.
The old model of worshipping the rich ‘because the provide’ is proving to be fallacious. New ideas about treating money for what it was designed to be must be introduced. Worth must be calculated on merit and intrinsic value. The divide between rich and poor is not a function of actuality. It has been invented by the rich to make the rich richer. People seem to think this is ‘natural’, the concept of social darwinism, but it is utter poppycock. The United States has a large rotten core, forgotten about by the largely right wing media because of ‘inconvenient truths’.
Governments are elected by the majority there fore they must serve the majority. That simply does not happen because of fatuous analysis of what income and wealth actually entails.
The idea that money equals power and therefore progress and societal standing needs to be re examined. Money is a bartering tool, not a weapon of mass destruction. So why is it that the top 0.15% of the global population own more than the bottom 40%? Hard work? They don’t know the meaning of the words. Try walking ten miles each way for a bucket of unclean water to cook and clean for your family. Our rich countries policies cause this disparity, and tax disharmony is a major contributor.
If the rich truly ‘love’ Guernsey then they should be willing to contribute to its long term survival. My instincts are that they are only here to widen wealth disparity.
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