For years now the messaging has been crystal clear. The package of reforms will indeed put the burden on high earners, and on the corporate sector, and on tourists. But it will protect, or even benefit, islanders on modest incomes.
That was always a deliberate strategy. Indeed, in many ways it is exactly what the community has been calling for. Ever since the introduction of the zero-10 income tax regime there have been constant claims that too much of the tax burden is now falling on individuals, and not enough on businesses. Of course, in many ways it would be better if the remedy to that unfairness was one which only impacted company profits, rather than hitting further up the profit and loss page. But scrapping zero-10 – while it continues in Jersey and the Isle of Man – would be the height of folly.
Likewise, the GST-plus package is about the only way to ensure that the really wealthy pay their way.
Sadly, it is possible for rich people to organise their affairs in ways which minimise their exposure to income tax. It shouldn’t be so, of course, but every change in the law to close such tax loopholes seems to simply spark clever new strategies from the wealthy and their accountants. Fortunately not every well-heeled person resorts to such clever tax planning, but too many do for this cohort to be said to be making its full contribution to running the island. By contrast trying to circumvent a consumption tax is nigh on impossible. But that is a subject for another day – today’s is social security reforms.
The bad news for Chamber is that the sort of reforms to social security contributions, contained as part of the previously approved fiscal package, will be pursued whether or not the other aspects of that package are endorsed by the current Assembly. It may not be able to be quite so generous, because the cross-funding from the proposed consumption tax won’t materialise, but similar changes in the contribution regime will still be on the cards.
There is a very good reason for that. The current system is supremely unfair on lower earners. Largely because there is no personal allowance whatsoever in respect of social security contributions. There is a threshold below which you don’t pay any contributions, but that is set so low that even a part-time worker, on minimum wage, will exceed it. And once you pass that threshold you don’t just pay contributions on the extra income above it. Rather you pay them on every single penny you earn. It is an appalling cliff edge which badly impacts those on modest incomes.
So what is the solution? Obviously to bring in a personal allowance, similar to the one which exists for income tax. But the actuaries are quite clear that the pension fund can’t afford to simply lose such income. Rather there needs to be other changes within the system to fund this much-needed reform. The answer is to move to a slightly higher base contribution rate – both for individuals and employers.
Let’s look at each situation.
Firstly, the individual contributor. Yes, the percentage of their income they pay in contributions will be a bit higher, but it will only be levied on income above the proposed new allowance. As a result not only those on modest incomes will pay less in social security, but middle earners will too. It is only when you get quite high up the income scale that the net impact of the two changes to the system mean you will be paying higher contributions. Indeed, it is precisely this reform, amongst others like the 15% tax band, which makes the GST-plus package progressive, where a simple GST would clearly be regressive.
What about businesses? Well I am afraid their contribution rates are heading north anyway. The States has already approved a 10-year programme which increases the employers’ rate by 0.1% each year, and that still has several years to run. It is true that the GST-plus package would see that peak brought forward and made marginally higher. I certainly don’t blame the Chamber of Commerce for complaining about this on behalf on their members. In many ways that’s their job, but the real question is what are the alternatives?
I think very few people now disagree about the need to raise more in public revenues somehow. So the burden of doing so will fall somewhere. If not on the wealthy, visitors, and the corporate sector then where? I look forward to Chamber's proposal in this respect.
