Getting personal on tax

A major overhaul of how the States taxes islanders and spends the money, driven by the long-term impact of an aging population, is the subject of a consultation launched this week.

Treasury and Resources and Social Security have stressed that no decisions have been made and want to hear islanders' views by 31 May so that if any changes are needed, they can happen in the next couple of years. In the first of a two-part overview of the consultation, Nick Mann looks at how the personal tax system could be overhauled. Next week will be the turn of benefits and pensions

How the personal tax system could change without raising more money

Abolishing the 20% flat rate

MOST households in Guernsey would pay less in tax if a new system of income tax was introduced which had staggered rates depending on how much was earned.

One of the options could be to follow the lead of other jurisdictions such as Jersey and the Isle of Man and introduce several rates.

The same amount of income that is achieved under the current system could be collected by having a 15%, 20% and 25% rate.

'The majority of households would pay less tax under this system,' the consultation document states. 'However, if ranked in order of annual income, households in the top 20% would pay more tax under this system with the top 1% of earners paying as much as an additional 4.5% of their gross income in tax.'

It states this system would be more progressive, but also more complicated and difficult to administer.

'At present, tax avoidance is low in Guernsey; however, a higher earners' rate could also lead to greater incentives to try to avoid tax.'

When considered together with the current Social Insurance contributions,

employed individuals earning over the higher income tax threshold, £44,001 a year, and up to the upper limit on Social Insurance payments, which was £119,000 this year, would pay 31p in tax and social insurance for each additional £1 earned.

'This could create competitive issues by reducing Guernsey's attractiveness for firms and professionals to locate here and drive away jobs and employment.'

Introducing a sales tax and lowering income tax

A SALES tax is a type of consumption tax, which the document states is among the most efficient ways of collecting money.

In the UK, VAT generates about £1 in every £6 of government revenue and Jersey generates about £1 in every £11 from GST, a total of £66m. in 2011.

The argument against a sales tax is that it is considered regressive, as lower income households typically spend a larger proportion of their income on taxable goods and services than higher income households.

The introduction of GST would result in an increase in prices and inflation,

although the effect on inflation would be temporary.

Two examples that could generate the same amount of money for the States as now are:

A GST of 10% accompanied by a reduction of the general income tax rate to 12% or a GST of 5% with income tax of 16%.

It would cost around £2m. to set up the administration, with an ongoing cost of £1m. a year.

There would also be a cost for business and it is feared a GST would drive more people to use online shopping.

Scrapping allowances in favour of lower income tax rates for all

MORTGAGE interest relief, tax breaks for pensioners, family allowance and other tax reliefs cost the States a combined total of £20m. in 2011.

Not everyone can claim them.

'Although this is a controversial issue, many would consider it fairer to treat the income of all taxpayers in the same way and give everybody the same allowances,' the document states.

An aging population could increase the cost of pensioners' tax relief from £3m. in 2011 to £5.5m. in 2040.

A family allowance of £15.90 per child per week is available to all households – in 2011, 6,900 families claimed.

'The removal of family allowance for all but the poorest households could be

justified on the principle that it is irrational for the States to give money to a household only to reclaim it in taxes.'

More than 7,000 households claimed mortgage interest relief in 2011, costing the States £7m.

'This relief is economically inefficient,' the document states.

The removal of these tax reliefs and the universal family allowance could be used to increase personal allowances by an estimated £4,100 per year.

'This would make individuals not currently receiving these allowances better off by over £800 per year.'

And how the States could generate more....

PRESSURE from the increasing number of people over retirement age in Guernsey will increase demand for pensions and care services.

The consultation states that no amount of efficiency will prevent the increase in expenditure required to continue to provide these services at the current level to an increasing number of people.

Although the document does ask about cutting provision, it also provides some

illustrative examples of how the States could raise an extra £20m.

This amount is used only to show what could happen – it makes no estimates of the actual extra amount of cash the States may need.

Increasing property tax

IT would need a five-fold increase in property tax to raise an extra £20m.

The average domestic TRP bill is currently about £150 per year, so this would increase to £750. The average parish rates bill is about £90.

By comparison, average UK council tax is £1,150 per year. In Jersey, typical total property taxes are about 30% higher than in Guernsey.

'Property taxes are economically efficient; they do not affect company investment or hiring decisions, nor do they impact household consumption or spending choices.'

Taxing higher earners more

MANY combinations are possible, but one example to raise £20m. would be a new tax rate of 30% on individual income above £44,000. This would impact around one- quarter of the working population.

Currently the top 10% of earners pay 40% of the total value of personal tax and social insurance collected in Guernsey.

'A higher earners' rate would result in a more progressive system,' the consultation states.

'However, there is a very high risk that it would undermine Guernsey's competitive attraction for middle and senior executive staff. It could affect firms' ability to attract skilled workers and make Guernsey less attractive to businesses looking to locate here.'

An alternative to a higher earners' rate would be to introduce a phased withdrawal of tax allowances, including the personal allowance, for those with an income above a certain amount.

For example, personal allowances could be withdrawn at a rate of £1 for every £5 earned above £44,000.

An individual with an annual income of £43,999 would receive an allowance of £9,475; at £50,000 this would reduce to £8,275; at £95,000 they would receive no

allowance at all.

The 22.5% income tax option

ANOTHER 2.5% on income tax would raise £20m.

The current 20% rate has been in place for more than half a century.

'In distributional terms, a higher general rate would impact all personal taxpayers. However, the system of allowances means that higher-income households pay tax on a larger percentage of their income than lower income households and as a result will experience a slightly larger increase in their tax bill relative to their income.'

The document warns that a change to the general rate could be interpreted as undermining the stability and predictability of the personal tax system.

Increasing social insurance contributions

TO raise £20m. through the social insurance system, contributions for employed people would need to be increased by 2%.

Currently the cost of social insurance for employed people is split between the employee, who pays 6% of their income up to £119,000, and the employer, who pays a further 6.5% of each employee's income up to £130,000.

Any increase in contributions could also be split between employers and employees.

Self-employed people pay contributions at 10.5% up to £119,000.

'Guernsey's Social Insurance contributions are already higher on middle and higher incomes than our closest competitors as a result of the increase in upper earnings limits between 2006 and 2008. While there was no significant evidence that the previous increases in employee upper earnings had any immediate impact on employment levels, their effects, negative or neutral, are more likely to be seen over a longer period.'

A goods and services tax

A 3% GST would raise £20m.

'A flat-rate GST would be an econom-ically efficient method of raising additional revenue and would have little impact on Guernsey's competitive position.

Revenues from consumption taxes are also likely to be sustainable.'

Scrapping allowances

REMOVING all specific allowances and the withdrawal of family allowance could result in a net saving to the States of £18m.

'There are fairness arguments both for and against such an approach. Many of these, including family allowance, single parents' and mortgage interest relief, are applied irrespective of the income level of the household and, in terms of distributional equity, are unfair.'

Their removal would have a greater impact on lower earners, it states.

Introducing environmental taxes

A tax of £121 per tonne of carbon would result in a net increase in revenues of approximately £20m.

If this was applied instead of the current fuel duty, it would actually mean the cost of petrol and diesel would fall for the motorist.

But it would mean new charges would apply to other fuel types, the most dramatic example being the cost of coal rising by 84% from £393 to £721 per tonne.

It is estimated that on average this tax would increase a household's total fuel and electricity costs by approximately £320 a year.

'As the price rises would be common to both households and businesses, only around 40% of the burden of the net revenue increase would fall on households. A carbon tax would be regressive as lower income groups spend a higher proportion of their income on heating and fuel.'