On the 15th July the JEP published the latest in a series of letters in which John Boothman attempts to demonstrate why Reform Jersey's figures on how much a tax rate of 25% on earnings above £100k are wrong.
One of the things I find most frustrating in politics is when people attempt to discredit your position by saying things which are not true, in the hope that because they've said it some people will believe them.
John Boothman's letters have been a prime example of this. Nothing he has said in any of them has been true and had he done any research he would have quickly found that out, yet he persisted with not just one letter but three.
So on the 16th July I wrote a letter to the JEP for publication to clarify these figures and explain how they are arrived at and why Boothman's attempt to come up with figures was completely flawed.
Since it's been a week and the JEP have not published that letter, I produce it here, along with a link to the Freedom of Information request that I reference.
Since it's been a week and the JEP have not published that letter, I produce it here, along with a link to the Freedom of Information request that I reference.
Dear Editor,
I did not originally intend on wading in on John Boothman’s ongoing debate with my Reform Jersey colleague Deputy Geoff Southern over how much a 25% rate of tax on earnings above £100,000 would bring in, however his latest attempt to rubbish our figures was so far off the mark that I feel it necessary to intervene.
Mr Boothman began his latest set of estimates by saying “If we assume” before attempting to draw out the figures of what earnings in those bands actually were.
Unfortunately for Mr Boothman, there is no need to make any assumptions because we have access to all the relevant figures thanks to a recent Freedom of Information request.
That request shows us that the number of people with a Jersey taxable income in 2012 of over £100,000 is 4,535 and that their income is a total of £935m. If you deduct the first £100,000 for each person that gives a total income in the ‘over £100,000 bracket’ of £481m. An additional 5% income tax on earnings over £100,000 would therefore have raised £24m in 2012. This corresponds with Deputy Geoff Southern’s revised figure and is approximately 60% higher than Mr Boothman's estimate of £15m.
This week’s revelations about the Council of Minister’s financial plans for the next 4 years should shock and offend any Islander with a social conscience.
They are targeting pensioners, young people and the vulnerable, incidentally none of whom are to blame for the fact we now find ourselves with a £145m looming blackhole. No Islander will go untouched as they introduce new taxes which none of them had the good grace to warn the public about before the election last year.
The government’s fiscal incompetence has been laid bare for all to see and they are desperately trying to rectify it by pursuing a brand of austerity more economically bankrupt and mean-spirited than even their counterpart in the UK is.
Reform Jersey believe that if we want to continue to live in an Island which looks out for the vulnerable, with well-funded public services which we can all rely on, it’s time to look at our tax model.
If Mr Boothman has a change of heart, he will be more than welcome to come join us and our friends in advocating an alternative which benefits the many, not just the few.
Deputy Sam Mézec
Chairman of Reform Jersey
Freedom of Information request - http://www.gov.je/Government/Pages/StatesReports.aspx?ReportID=1391
Well said Sam, and what about removing the cap on social services, that should just about do it!!
ReplyDeleteThere is one flaw in you calculations. You do not know the distribution in each tax band. This could increase or decrease your end result.
ReplyDeleteSee anonymous at 21.49 on that point.
DeleteOne thing it doesn't take into account of is pension contributions which are tax deductible, which would lower the total amount, but it's impossible to work it out. It won't be terribly substantial though because there is now a cap on how large a contribution you can make and still deduct it from tax.
The pension issue might be more substantial than you assume.
Delete1) Pension contributions are deducted from taxable earnings, rather than 'from tax' directly
2) Annual allowable pension contributions are a maximum £ 50,000 per annum
3) Tapering of allowable pension contributions begins at earnings of £ 150,000 per annum.(So anybody earning under this figure can realistically reduce their taxable income by
£ 50,000 per annum by contributing the maximum sum to their pension)
Therefore income tax receipts may be impacted by pension reliefs up to a maximum earnings of £ 199,999 per annum.
An increase in taxation on earnings of over £ 100,000 per annum is likely to see people alter their pension contributions in order to reduce their taxable income. (Why would anybody not take this perfectly legal step of effectively giving the money to themselves, and receiving relief, rather than suffering the extra taxation ?)
If we assume that the 3,396 falling into this pension cohort shift only and additional half of the annual allowance figure (£ 25,000) into pension contributions out of their earnings, that would see a reduction in taxable income of £ 84,900,000 million, and thus a reduction of £ 16.98M Million in actual tax receipts.
And this is based on people only using half of their annual allowable reliefs. However if even only half the reliefs are used in this manner, you projected extra income of £ 24M would be reduced by nearly £ 17 Million,
I assume therefore that your proposed additional tax measures would also have to be accompanied by a proposal to restrict tax reliefs on pension contributions by those earning over £ 100,000 (Or potentially £ 50,000) ?
I'm not sure this makes sense. Earnings above 100K are taxed at 20%, why would an extra 5% cause such a massive shift in tax planning habits? The FOI stats show that this isn't happening now so why would an extra 5% make such a difference. Perhaps the answer is that today's pensions are not very good. I'd rather pay a bit more tax than throw money away on a defined contribution pension. Might as well just give cash to the investment managers and be done with it."Why would anybody not take this perfectly legal step of effectively giving the money to themselves" because you aren't giving it to your self, your giving it to the fund managers and gambling that it will increase in value. Also, I could be wrong but isn't there a limit on how many times you can use the full allowance?
DeleteSomeone earning 200K doesn't get a pension allowance. The allowance is reduced by £1 for every £1 of earnings over £150k.
DeleteWould be nice to see the whole allowance reduced though as its far too generous.
Anon @ 10.36 - Perhaps you missed my comment: ' Therefore income tax receipts may be impacted by pension reliefs up to a maximum earnings of £ 199,999 per annum.'
DeleteEncouraging people to save for their retirement is a good thing. What isn’t ‘nice’ is encouraging people to rely upon the State (i.e. the public) to look after them in retirement. The present allowances encourage middle earners to save. Higher earners, because of tapering relief, benefit proportionately less from pension contributions. I’m not sure why you object to the former, but I’m sure you are pleased about the latter.
Anon @ 10.29 - Why would having to pay an additional 5% on earnings above £ 100K alter tax planning habits ?
Here's an example - Imagine you earn £ 150,000 per annum and are presently contributing £ 25,000 to a pension. Under the existing regime, you would pay tax at 20% on £ 125,000, so your liability, absent other allowances, would be £ 25,000.
Under Reform's proposals without a change to your pension contributions, you would pay tax at 20% on your net earnings of £ 125K (So £ 25,000) and £ 25K at 5%, so and additional £ 1,250, giving a total tax liability of £ 26,250
Now, because you don't fancy suffering an additional tax of £ 1,250 on your earnings, you decide to contribute that amount which would suffer the tax of £ 25,000 to your pension, giving you a total contribution of £ 50,000. That would then give you a total tax liability of £ 20,000,(20% on net earnings of £ 100,000). This would represent a saving of £ 5,000 per annum over your old bill. Not only have you avoided the £ 1,250 additional charge, but there is also a net loss to the exchequer of £ 5,000, directly because of the changes Reform are suggesting.
And yes, you have given the money to yourself, because you are the owner of your own pension scheme. By making the contribution of £ 50,000, you are effectively earning an additional 20% return in Year 1 because of the tax allowance given. I'm not sure of your experience with investment managers, but you might need to change your advisor if he is managing to lose 20% in the first year, which is what he'd have to do to make the above planning worthless. (Alternatively, you could leave the money in cash in your scheme, and pick up the additional 20% return. There is nothing in pension legislation that stipulates that you have to invest the cash).
So would the proposed changes make a difference to planning ? I’m pleased for you that you are well off enough that under Reform’s proposals, your conscience is worth more than saving a net £ 6,250 in tax. I’m ashamed to admit that I’m not as good a person as you. As you might appreciate, I’m pretty well up to speed on pension legislation, and I’m not aware that there is a limit on using your annual contribution, but I have been known to be wrong on many occasions.
Of course, I realise that the above changes in planning wouldn't happen in all cases, but I bring this scenario up to demonstrate that without a thorough understanding of the consequences of Reform's proposals, the net gain in tax might not materialise, and could even result in a net loss in income
Anon, encouraging people to save for their retirement is great but is only necessary up to a point. £50Kpa goes way beyond what most people need for an OK retirement. What's the point in giving people such a generous tax break. When I was earning well over £100K and paying 20% tax I gave up my pension because it was a waste of money, even with the tax breaks. There are much better things to do with cash especially when investment returns are so low and management fees are around 2%. The unpredictability of annuity rates makes defined contribution pensions a gamble that in my view will lead to huge scandals in years to come when people start realising that they are not getting the pensions they were promised. Why throw money away just to save tax? If it were that good an idea people earning 150K would be using their maximum allowance now. Putting an extra 25K into a pension (and thereby reducing your disposable income) just to save an extra £1,250 in tax is just ridiculous. And if they don't need the £25K to spend what are they doing with it now? There might be a small change in habits by some people but I suspect most would just lump it.
DeleteWhat do you define as an OK retirement ? With bond yields at near all time lows, and annuity rates also suffering because of changing demographics, the income derivable from a pension scheme is low, and showing no sign of improvement. Working on present annuity rates of around 5%, you would need a pension pot of £ 600,000 to give a reasonable average income of £ 30K per annum. If, as you inform us, pension returns are negligible, £ 600K requires 12 years of contributions at £ 50K, or 25 years at £ 25K. Given that most people won't be able to afford anything like that until later in life when mortgages and school / Uni fees are paid, the £ 50K limit doesn't seem unreasonable to me.
DeleteA defined contribution scheme by definition doesn't promise you anything. Somebody might have received projections based upon certain annual returns, but that does not represent a promise by any definition.
Putting money into a pension scheme gives you an effective first year return of 20% on that contribution. I'm sorry that you have had a bad experience with your own pension, but even averaged out over 5 years, that's a risk free return of 4% per annum. If you could point out a similar investment offering that sort of guaranteed return, I'm sure I wouldn't be alone in snapping it up. It would hardly define throwing money away to save tax.
There are pensions available with total charges of under 1.2% per annum.
Would most people lump the changes ? Possibly, but the initial point of this post was pointing out that a straight line correlation saying an extra tax of X would lead to an extra income of X isn't necessarily correct. People change their behaviours to suit new circumstances.
Have you considered that people might change the type of investments they hold so that returns are skewed towards capital growth, rather than income producing instruments ? Or that partners might choose to leave revenue in the partnership, or any other myriad changes that can be made to mitigate income ? Or indeed that the dead weight cost of collection and re-distribution of the additional revenue might consume from the additional revenue raise ?
People earning the sort of sums we are talking about are usually pretty smart, and to believe that a blunt instrument such as a single tax charge is likely to result in a straight line increase in revenue is naïve to say the least.
I know the extra tax raised wouldn't be zero. I also know that it wouldn't be the £ 24 Million quoted. To spend time arguing about figures seems to miss the over-arching point that there are exactly zero countries in the history of the world that have increased overall prosperity of their nation through increased taxation.
Anon, your last point is hilarious. The countries that consistently score highest in prosperity related surveys are the ones with the highest rates of personal taxation.
DeleteThe facts speak for themselves well done for getting them, and correcting myths - over to you Mr Boothman?
ReplyDeleteAnonymous at 15:19, distribution does not have any effect on these figures. There are no tax band that affect people earning over £100K.
ReplyDeleteTo the person who sent a troll comment at 1:10am, I recommend you seek help, as you clearly need it.
ReplyDeleteDo you refer to all basic mathematical questions as troll comments?
DeleteNo, that blatantly is not what my above comment is referring to.
DeleteIf you want to vote for a vicious cyber bully who attacks young mentally ill girls, that's up to you. Thankfully you'll be in a very small minority as the past two elections have shown.
DeleteThere are fundamental flawed assumptions in the calculations of the additional tax yield should a 5% 'high earner' tax rate be introduced. The assumptions and calculations also completely disregard a number of issues surrounding the situation of 1.1.k (or equivalent) residents which show a lack of thought, research, and understanding by Reform when putting this together. I'll wait till the letter is published by the JEP (if it is) at which point I will be happy to put things straight.
ReplyDeletePS - I've got a screen print of this blog with this comment posted - I wonder how long it will last before it's deleted.
Nice try, but if you'd bothered to read the FoI request you'd see that that point is comprehensively answered in it.
DeleteIt helps to do your reading before trying to be arsey.
Re: 1(1)K's:
ReplyDeleteIs your proposal to therefore impose an additional 5% income tax on earnings over £ 100,000 for residents who live in our island under 1(1)K arrangements ?
At the moment the policy is to increase the base amount they pay from £125k to £150k (bearing in mind that when it was raised from £100k to £125k the number of people applying to become 1(1)Ks shot up).
DeleteThe rest of that policy is currently under review.
Understood, so will there be a requirement to amend legal agreements which the client's signed up to when they received their 1(1)K status, or was this not part of a formal contract ?
ReplyDeleteAlso, do you have a breakdown of the 1(1) K's contribution to the tax and earnings bandings which were detailed on the FOI request ? (i.e. to understand the manner in which excluding them from the 5% increase over £ 100K would have on the total additional revenue raised from those who would be subject to the new tax, adjusting of course for the increase from £ 125K to £ 150K)
The first one is a good question. We'll be working it out shortly, as we intend to lodge something amending the MTFP on this.
DeleteThe FoI figures do not include 1(1)Ks in them. I believe there is a report gathering dust somewhere which will reveal it, however it will be a bit out of date now and I'm not sure where to find it.
'The FoI figures do not include 1(1)Ks in them.'
DeleteI think this might be a mistake, as the comment on the bottom of the FOI request states:
'The figures provided do include income from taxpayers who reside in Jersey under the 1(1)(k) scheme (and its successor).'
If they do include 1(1)K data, and it is found that the 5% additional tax would not be applicable to them under their current arrangements, what impact do you think this will have on the projected additional tax take ?
'(bearing in mind that when it was raised from £100k to £125k the number of people applying to become 1(1)Ks shot up)'
ReplyDeleteIt would appear unlikely that cause and effect are directly related in this instance, and that the new applications were likely to due to influences which were extraneous to the island.
Would you agree ?
Indeed and it's always worth reminding people of that point!
DeleteI never buy the JEP but have they published this letter yet?
ReplyDeleteIt was finally published on the 3rd August and apparently will be followed up with an article about the figures revealed in the FoI request.
DeleteActually there is an authority on 1(1)Ks his name is Nigel Philpott and has now retired as the Mr Fixit for extremely wealthy people thinking of taking up residency on Jersey.
ReplyDeleteHe is the ex executive from Jersey Tourism and his views are clear. Against modern myth, the rich do expect to pay tax, they also want to leave their money to their family and not have the UK tax man help themselves to 40% after £325 K?.
Would they leave Jersey if they were expected to pay more into the pot, Answer No !
Suggest you speak with him on the phone and confirm this view he has offered to several people. As long as inheritance tax stays at zero, and the States do not get greedy, they are going nowhere but might winge a little.
Indeed. In fact the wealthy in Jersey are being asked to pay more any way.
DeleteThey're paying an extra 1% soon for the LTC charge, they'll be paying X% more for the Health Tax and more yet for the Waste Disposal Tax.
Jersey no longer has a 20% tax rate anyway. So I say, let's just come clean about it and rather than introducing a new expensive bureaucracy to administer new taxes, keep the costs down by simply using the taxes we already have and adjust the rates.