OPINION ‘Someone else can pay’

A VERY frequent response to the need to raise taxation in the medium term is the assertion that increasing tax on the wealthy is an easy and obvious ‘silver bullet’ solution. So, let’s look at personal tax. Each person’s public services currently cost £11,000 per year, while the average person pays £7,000 or so in tax and social security combined – in other words £4,000 per year less than it costs to provide public services.

The States pension, which we commonly refer to as the ‘old age pension’, costs just over £12,000 per year, per person. No average person is therefore paying anywhere near enough for their public services each year, let alone up to 30 years of pension payments.

That isn’t a criticism but a reflection of the facts as to where we now find ourselves. As more of our population have crossed into retirement, there is more money going out of the public pension pot each year than is being paid in.

The fund is substantial, but at the rate we are drawing it down it will run dry in 16 years, meaning if you, like me, are in your mid-50s there will be no money left to pay it, except from the tax and social security paid by those still working.

Why can’t the rich just pay more? Well, it sounds like the easy option, but the simple answer is there aren’t enough of them to make it even remotely possible. Each 1% of income tax across the whole working population raises just over £13m. per year (and remember that we are facing an £85m. deficit).

If you only increase the tax paid by the ‘wealthy’, the percentages very quickly become untenable. For example, to raise the predicted £85m. shortfall would require the personal tax rate on income above £60,000 per year to be doubled to 40%, with social security contributions of nearly 12% in addition to this.

That’s a marginal rate of up to 51.3% on those earning £60,000 or more. This is a healthy salary but hardly the millionaire ‘super wealthy’ which many people imagine are out there in large numbers – the idea of coming to Guernsey to work for £60,000, but to take home £29,000 (i.e. less than the median wage) is not very enticing. Once you set the income bar higher, the income tax rate required very quickly exceeds that in place almost anywhere else in the developed world. Guernsey would become a place to avoid, not a place to come and live and work, open a business, or invest.

This is one of the reasons why the tax review requires recommendations which are sustainable and do not harm our international competitiveness and allure as a place to live, because our economy relies on it.

So ‘eat the rich’ is simply not a tenable solution. One of the only things which we can be sure about imposing high tax of this sort, proven repeatedly the world over, is that the island would experience substantial emigration of the wealthy and professionals who can relocate, leading to substantial reduction in tax revenue, and even more tax pressure on the remaining working population – a spiral which must be avoided at all costs.

It is also worth noting that the wealthy in Guernsey – the top 6% – already pay 25% of all income tax and social security contributions. That is as much in total as the lowest 60% of all households at the other end of the scale. These highest earners do not receive any tax allowances and already pay social security contributions on a much larger proportion of their income than they would if resident elsewhere in the world.

Only a handful of the very richest taxpayers, the top 0.1%, benefit from the tax cap. Such members of our society also commonly pay for private education and private medical treatment, and do not need a state pension (albeit we still pay it to them regardless of need).

So, what about zero-10, let’s stop that and put it back the way it was? Well, very simply, we can’t.

International organisations found our tax system before the introduction of zero-10 was unfair and represented a harmful international practice. Had we not changed it, our financial services industry would have been blacklisted worldwide, and the economic cost would have been huge.

Between the people employed, corporate tax paid and via support industries such as legal and accounting services, the finance sector contributes more than 50% of our GDP.

Since zero-10 was introduced, the type of organisations paying corporate tax at 10% has been widened so that almost all financial services businesses now pay tax. At the same time the gap created by zero-10 was closed by other measures – since 2012 the TRP on financial services, law and accountancy firms has risen by more than 1,000%.

The crucial issue about corporate tax is that we are committed to international obligations as well as staying in lockstep with our closest competitors in the Crown Dependencies, at the same time as remaining competitive in a very finely balanced offshore market. We are working very hard to find alternatives which can raise more without causing harm to the economy, but we cannot simply jump out of step so far that we risk our current competitive position. To be clear, if Guernsey loses business, Guernsey people lose jobs and the tax burden on other individuals will rise further, because the cost of pensions and healthcare will continue to rise over the next two decades.

We are discussing corporate tax with the Crown Dependencies and the wider international community, and the Policy & Resources Committee is also commissioning a further piece of work locally to provide us with yet more detail and analysis on taxing corporates.

We genuinely want to leave no stone unturned and spread the burden of raising revenue as wide as possible. There are lots of claims out there about how we could tax corporates differently, and estimates of what that might raise, but not all of them are realistic or based on any evidence, consultation with industry or assessment of risk.

It’s important to separate the fact from the fiction so that the public and deputies have all the facts. If another deputy, or anyone else, has a solution, then P&R would be delighted to hear it. This is a vitally important area of policy which deserves thorough review. Submitting ideas at the last moment as untested and unchallenged amendments to one of the most complex areas of government responsibility and economic risk at a crucial time in planning our future cannot be the right approach.

Now is the time for working together collaboratively to find a solution, which however difficult, is the best way to move the Bailiwick forward and meet our financial challenges.

No decisions have been made, we remain in listening mode, some messages from the public are already very clear and we will summarise them when we reach the end of the period of engagement we are embarked upon, before the Policy & Resources Committee decides how to proceed.

u Don’t miss: Heidi Soulsby tomorrow.