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Better Alternatives to Taxation

Updated on February 11, 2010

Everyone who enters this sordid and ugly world of politics has a pet hate - mine is taxation. There are two aspects that I wish to deal with: the first is the abuse of existing laws, particularly income tax and ITIS; and the second is the inadequacy of taxation to resolve our problems in the first place.

As a repsonse to interntational pressure to tidy up its dubios reputation as a Tax Haven parasitising the World Economy, States members have come up with a new tax law called Zero/Ten. The way it works is quite simple: if you are a bank or similar organization you get to pay 10% of your income as tax. If you are any other kind of business (other than the utilities), you pay no tax. Instead, profits are declared as personal income and are divided up amongst the shareholders in accordance with their proportion of their shares. That way, there is no difference to anyone who lives in Jersey. However, if you are not a Jersey resident, you no longer pay tax in Jersey. Instead, you are expected to declare any such income to the Tax Department of your residence and pay tax on it there. The irony is that it has only been in place a year when it has already come under fire from those same international pressure groups as being inadequate. Nonetheless, it is still in place as we speak with all the financial implications that it brings

Quite why the States of Jersey decided to halve the amount paid by the banks has never been made clear but it has led to a  £100 million shortfall in tax revenues that needs to be dealt with. One way put forward was to reduce the civil service who everyone agrees is bloated, ineffetual and overpaid. However, in the past 5 years, the civil service has actually increased by almost 40%! Having given up on trying to maintain the civil service, let alone reduce it, they have chosen to make us bear the costs of the by the increasing number of ways that we pay tax. In other words, they are making us pay for the privilege of having the banks here. Why are we doing this? The usual answer is that we need them. In fact, we need them so much we had to promise to bail them out recently to stop them from closing. That tells me that we do not need the banks

ADDITIONAL TAXES

Let's put this £100 million in context. There are about 50,000 paying income tax. To get £100 million, you need to raise an average of £2,000 per person extra. The two solutions that have been implemented of "20 Means 20" and GST and should easily achieve that. So there should be no more taxes after this, right? Wrong. There is already talk about Green Taxes and there are rumours of a distributor tax similar to GST.

Why is there this need for more taxes? Well there are two major reasons:

1. THE REAL COST OF GST
GST is here to stay because it has brought 125,000 new people under the control of the Income Tax Department:

  • 25,000 Unemployed - that is children, pensioners, the disabled, mothers who stay at home to care for their children those without a job and, of course, those who the States themselves say are not earning enough to pay tax
  • 100,000 tourists - if the JEP almanac figures are to be believed

There is no way any politician or civil servant would give that up ever again without a damn good fight

I am not going to talk about its effect on food costs - 13% increase in the year it was introduced. I am not going to talk about how prices went up just before GST, went up with GST and even went up when there was talk of removing it from food

The real cost of GST is much greater. Any average person can tell you that if you take 3% more out of everyone's wages, they have 3% less to spend. So, in a perfect world, 3% GST would just mean 3% less income tax or a net loss of £10 million - which was the cost of implementing GST in extra Tax staff and equipment. In the real world, 3% GST means business closures. Costs go up 3% and profits drop because people have less to spend. That directly attacks the profit margin of the business which means that they need to sell more just to get the same amount of profit as the previous year. The result: Rock Island, 101 Toys, 2 smaller toy shops, Horseplay and Bissons have already closed this year. This has a knock on effect:

  • A business closes - so the Income Tax Department loses its income tax
  • People are put out of work - so the Income Tax Department loses their income tax
  • The landlords make less money - so the Income Tax Department loses some of their income tax as well

In a pefect world, 3% GST would just mean 3% less income tax. In the real world, 3% GST means a lot less income tax. And that is going to have to be replaced - probably with more GST which will causes more closures. Remember VRD?

2. CAPITAL PROJECTS
Public spending is not going to stop. In fact, it seems to be getting worse:
£106 million (and counting) for the new incinerator plant
£383 milllion (and counting) for the esplanade development
1.5 billion euros (and counting) for a bridge to France
And a measly £60 million for better healthcare - small change

And no one seems to be asking where all the money is going to come from.

3 PROBLEMS THAT SHOW TAXATION IS NOT NEARLY ENOUGH

THE SPENDING BLACK HOLE

Having sorted out the £100 million shortfall of last year, it now appears that there is an additional shortfall of £50 million to contend with this year. This means another £1,000 out of each taxpayer

CLIMATE CHANGE

Let us presume that the States of Jersey are right and there is going to be an increase in sea level of just 3 feet. This will mean that our sea defences across the whole island will have to be strengthened. Figures for this are vague at the moment, but it will be in the region of £1 billion or an xtra £20,000 for each taxpayer.

THE AGEING POPULATION

The Ageing Population is a double whammy.

  1. There are the increased costs of more pensions - especially now people are living longer - and increased healthcare costs - precisely because people are living longer. This has been estimated at £60 million (or about £1,200 additional costs for each tax payer). I personally believe that that figure is woefully short. I believe that this figure is just to get people used to the idea and then they will slowly increase in conversations
    There is also the problem of less tax payers. The proportion of retirees in the population is increasing - dramatically too. This means that the cost of an ageing population will be placed on fewer shoulders which will dramatically increase the amount of money that the reduced working population will have to pay on this and the other two problems

WHY TAXATION IS STUPID

The real problem with taxation is that you can only tax people when they are within your borders. As soon as they leave, you can no longer tax them. Now when you are the size of America, India or China, this is not such a big deal. Even if you are the size of Britain with its popuation of 60 million, it is not much of a consideration. But when you have a population of less than 150,000 like us, then it is a very real issue. This is especially problematic when you realise that the majority of our chldren have to leave the island in order to pursue their careers. For every person living on this island, there are approximately 75,000 people living elsewhere in the world.

This is why, until recently, we were an exporting island - because we knew the money was not on the island, it was in the rest of the world. This is something we have forgotten.

REAL ALTERNATIVES TO TAXATION

Our ministers are spending a lot of time wooing Indian and Chinese money into the island by telling them how clever we are with money. Yet if they bothered to look at how we manage our own money, they would run a mile.
Our universal response to our present and future financial problems is the same: more taxes. Whether it is the discussion about gas guzzlers, the environment or Mr de Petrovsky's comments about pets, the cry is the same:
"Tax! Tax! Tax! But don't tax me!"
What is particularly amazing to me is that many other countries have been using alternatives to tax in order to succesfully raise more money from outside of their borders - and have been doing so for decades!

I will seek to set up a Sovereign Wealth Fund whose task will be to take surplus funds and invest them elsewhere in order to generate money outside of the island. This is not a new idea. The Norwegians have been doing it since the 1950s and nowadays every country appears to have at least one Sovereign Wealth Fund active around the world - everyone but us.

A Sovereign Wealth Fund is where the government of a country uses their excess funds to generate money by investing in companies outside of their borders. This has the a number of real benefits: it makes them less dependant on local fluctuations; they are able to take advantage of opportunities elsewhere; and it increases their sphere of influence.

We had something like a SWF running for many years in the form of the States Home Loan programme. This was a very sound investment. People were able to afford their own home and the States of Jersey generated 2.5 - 3.5 times the money back depending on the interest charged because that is the standard return on a mortgage for any lender. It also had the effect of stabilising the housing market. Had we continued with this, the island would not be so exposed to the current banking instabilities

According to recent reports by Senator Walker, there are £600 million sat in a bank account somewhere (and we all know how safe banks are) that could be used for this purpose. However, it is not a lot of money for a SWF. In order to increase its effectiveness, I would seek to enable the people of Jersey to invest in it whereby they would earn interest on their money. In order to make this investment more preferable to others, I would seek for any income from it to be tax free (much like National Savings Bonds). After all, rather than just having 20% of your funds, the government would have had access to the whole 100% so there would be no need to tax it.

I would like to see two SWFs set up. The first would be a conventional fund investing overseas. The other would be set up to invest in local companies for the sole purpose of getting them to grow overseas. At the moment, we bring in companies from England, Ireland, France, America and anywhere else other than Jersey to carry out any projects for us instead of using these projects to develop local companies. The net effect of this is that all the money spent goes straight out of the island never to be seen again. Meanwhile, our local companies go to the wall through lack of funds or become dependant on outside forces like Jersey Electricy Company. Instead of getting foreign firms to come into Jersey, we should be developing local firms so that they can operate in Britain, mainland Europe and the rest of the World.

This SWF would seek to safeguard our rapidly failing existing industries of farming and tourism. Rather than let our farming industries die, why not encourage them to set up farms in Europe where they are closer to their markets and could also take advantage of European grants to grow even larger? Why let our tourist industry die when we could invest in it so it can move into current tourist hotspots like Ibiza? Every single industry operating in island from building to retail could all be helped to grow into multinational concerns and in so doing generate money for Jersey.

In addition, this SWF could be used to create new industries with an eye to export. I personally would love to see it invest in renewable energy production with the view of making us self-sufficient in energy use as we once were and then exporting that expertise elsewhere to generate even more money. At the moment, we import all of our energy in the form of electricity and petroleum-based fuels. So we are paying France for our electricity when we could and should be paying ourselves. The stupid thing is that renewable energy forms are viable in the English Channel otherwise the French would not be using them within sight of our North coast. Once we have created enough electricity for ourselves, what is stopping us selling it back to the French through that same cable that now supplies us?

The net effect of these SWFs would be a bouyant economy not dependant on a single industry or on outside forces beyond our control which would place large sums of money into our economy to eliminate the need for additional taxes. It amazes me that none of our existing politicians have thought of it already - especially those whose tasks require them to grasp economics.

I firmly believe that we have no right calling ourselves a world finance centre until we have at least one SWF

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