27 September, 2009

Income Tax

The Foreign Office is reportedly demanding that Cayman Islands and Anguilla impose

income tax on its citizens in return for permission to increase borrowing to meet October’s public service salaries.  I was interested when a correspondent sent me a link to a recent Guardian Newspaper article by Nick Mathiason.  He reports that the income tax stand-off is the main stumbling block in the way of both island-countries being granted permission to borrow.  And, borrow they must if public service salaries are to be paid in October.  The Treasury coffers are empty.  In the case of Cayman Islands, public school-building projects are already being shut down for lack of payment for work done.  Anguilla cannot be far behind in defaulting on obligations to contractors and other creditors. 

The British are apparently playing hard-ball and refusing permission to borrow unless income tax is introduced.  I say ‘apparently’ because our government has kept us completely in the dark as to the details of the negotiations with the FCO, and the reason for lack of any sign of progress to date.  We do not know what conditions the British have laid down to agree to more borrowing by the Government of Anguilla.

I well recall that in the year 1978 the GoA was studying options for increasing employment opportunities and revenue streams.  The then Chief Minister set up a small committee to consider the international financial services industry.  The committee strongly recommended that government should support the development of the industry. 

Government was also at the time studying the option of income tax.  That option was rejected.  Instead, that same year, the Income Tax Act which had lain dormant since the Anguilla Revolution of 1967 was amended by an Act of the House of Assembly to permanently suspend the collection of income tax in Anguilla.  I seem to recall that the Income Tax Act was subsequently repealed, though don’t quote me on that.

The economics were simple to work out.  With a population of some 6,000 persons, there were at that time probably a total of 1,000 employees on the island.  Most of them were government public servants.  It did not make sense to set up a government Income Tax Department to collect income taxes from mainly government workers.  That would be like taking money from one pocket to put it in another.

Government at that time made a deliberate decision instead to impose indirect taxes as a low-cost method of raising revenue, rather than go for the expensive and unwieldy mechanisms that would be required to police and collect taxes on income. 

Now, thirty-plus years later, a great deal has changed.  In particular, we probably now have a population of 12,000 souls, at least 2,000 of whom are employees receiving a pay-cheque from both government and private employers.  There are probably another 1,000 self-employed accountants, building contractors, carpenters, fishermen, lawyers, and shopkeepers.  

No one at present pays one penny in direct taxation.  Anguillians instead pay a host of duties, licences and fees on such a wide range of goods that Anguilla is one of the most expensive places in the West Indies to live in.  All we are missing is a tax on services.

Has the conclusion made in 1978 about the cost/benefit ratio changed in any significant degree? 

In other words, would government receive any real revenue if it were to impose an income tax on Anguillian employees? 

Would our Inland Revenue Department be able to impose and police an effective income tax on self-employed persons without a massive investment in new personnel and equipment? 

What would be the likely impact on Anguilla’s already fragile economy as residents begin to take both avoidance and evasion measures?

What would be the political fall-out when Anguillians wake up to find that all the major players in the local economy have been granted 20-year income tax holidays, while the common man is caught in the tax net?

I don’t suppose the British could care less. But, our politicians certainly do.

This time they are right to resist British pressure, even if for the wrong reasons.  It would help us all to be more confident if they would release the appropriate studies they must have had done on the ineffectiveness of introducing income tax.  They must have made such a presentation to the FCO in the last few months.  It would be the easiest thing to publish the data.  Why keep it all so secret?

They do not have the option of borrowing from the local banks without FCO permission.  The result of such an action would be an immediate falling away of public confidence in the integrity of the local banks, and a run on them that would make the run on Stanford’s bank in Antigua a couple of months ago look like a trickle.

Not that I am worried.  I rely on the Governor of the Eastern Caribbean Central Bank to speak firmly to the Chairman of the Caribbean Commercial Bank and the General Manager of the National Bank of Anguilla.  I rely also on the external auditors of all three to speak even more firmly to each of them.  Then, there are the two Boards of Directors.  There must be someone with backbone and integrity among all those prominent entities.

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  1. Goodbye Libertarian Paradise.

    Of course, if gov.ai actually repealed *all* duties, fees &cet, and made a *flat* income tax constitutionally limited to less than, say, 7% of a person's income, no tax on interest or dividends or capital gains, no tax on corporate or business income (ask your accountant for a definition of "double taxation" sometime), no "value added" taxes, no sales taxes etc, with a further constitutional stipulation that gross tax revenue of any kind, heck, gross government economic impact itself, cannot exceed some fixed percentage of gross domestic product, like Milton Friedman wanted to do, fine.

    If people actually have to *pay* the government this tax, write it a check once a quarter, and not have to have it "deducted" from every paycheck so they don't *see* how much their government costs, even better.

    A business-favorable, and freedom favorable, climate could actually be created on The Rock.

    But, we all know too well, as the man mockingly said on TV: "Nuh-uh! Ain't gonna happen!"

    This new tax will be on *top* of all the *other* taxes, to better hook somebody else's cousin, brother-in-law, &cet, to government's currently dribbling cash-flow standpipe.

    No matter where you go, there they are.

    With their hands, up to the elbows, in your pocket.

  2. Both in Cayman and here in Anguilla there are those who demonise any form of taxation, while it is the same people who complain about the condition of the hospital, the roads, and the services provided by the public sector in general. I think that is very naive attitute based on ideological preconceptions (did I hear anyone quote Milton Friedman?). Granted, taxes are bad when the revenues they raise are wasted, but not in and by themselves. It is time we considered the collective good in our conversations about our society, especially now that the opposite view (every man for himself) has led us down this path of economic catastrophy. People take government for granted. As ineffective as it may be, and as much as it may be in need of reform and a good reminder of who is the boss (the voter) every now and then, we need it to work for all of us, and it can't function without revenue. Hopefully that revenue will be collected in a fair and balanced way. Notice the subtle difference in the discussions in Cayman surrounding "payroll tax" and "income tax", with their government seemingly more in favor of the former as the lesser of two evils, i.e. letting only people who work for a living pay up, since we can't scare the rich people away. So much for "fair and balanced"...

    I do wonder how successful Anguilla (and Cayman is not far behind) would be in actually collecting income taxes. How many additional bureaucrats would the government have to hire? If the collection of other fees is anything to go by, anyone (starting with the leader of the opposition) could just claim they didn't want to pay for whatever reason. So much for the "collective good", and for my rant.

  3. Taxes are our monies taken by governments to squander amongst themselves and given to banks recently by bailouts.
    No country will ever become richer by imposing taxes. Look at the current situation where all countries are virtually bankrupt especially the ones whose taxes were the highest.
    This surely tells us that to tax the people so that governments may give it away to others at will, is truly wrong.
    As far as i am concerned it has been proven that taxes have not and do not work. Taxes will only line the pockets of a few who normally don't need monetary help anyway.
    Look at the people in the tent cities in the US, paying taxes didn't help them. Look at the unemployment and foreclosures everywhere and in the UK, paying taxes didn't help them.
    Revenue of course is needed but must be spent wisely and with transparency, not wasted, and in the good times extra must be put aside for the proverbially rainy day.
    Taxes are not the whole answer we need at the moment. Good Governance must be imposed first.

  4. Taxes make government officials greedy. The more taxes they collect, the greedier they become. There is already enough greed to go around in Anguilla. We don't need more.

  5. It seems to me that the way out of the budget "crisis" is not to strangle the economy with confiscatory taxation and further regulatory kudzu, but to sell *everything* the government does that anyone *else* can do instead.

    "Healthcare" (like "worker", a socialist loan-word), education, the National Bull (the one grazing at the airport...) the National Tractors, most of the "public" lands that don't have government buildings on them, even, yes, Lands and Surveys itself.

    Then, to further lower prices, liberate commerce.

    Sunset *all* monopolistic licenses for cable TV, electricity, telephone, water, trash disposal. Stop licensing taxicabs (*taxicabs*, people! how insane is that!) so more people can become cab drivers.

    Stop confiscating incentive with excessive regulation. Why does the government need to know your business plans? It's completely unethical. Business plans, of all things in business, are supposed be private, and *not* public knowledge.

    Stop regulating everything on Anguilla that people do to make money so that they can make *more* money and take care of themselves and their loved ones, instead of relying on government transfer-payments or government "employment", or, more usually, specious promises thereof at election time.

    Government, is, at its root, a monopoly of force.

    Fine. Let them own force. They can protect our physical persons and property from force and fraud.

    Everything else belongs, by natural right, to individuals, not to government.

    Free Anguilla.

    Even better, free all *Anguillians* so they can survive, even thrive, in the coming hard times.

    Hard times caused, first and foremost, by *other* people's governments.

  6. We can expect the British government to give very limited and strictly controlled approval to Anguilla’s requested extension of borrowing powers, if the announcement in the Cayman Islands is anything to go by. See Caycompass

  7. The Executive Council met this morning to hear the news from the FCO, relayed by Governor Harrison, on the terms and conditions under which the FCO will permit the requested $49 million borrowing.

    Our leaders set a historical precedent. Apparently inspired by Hubert's rudeness in walking out of the House of Assembly recently, the four Ministers walked out on His Excellency.

  8. So what are you saying? It was approved, but the Ministers are not going to honor the conditions, so there will be no borrowing? Any details on conditions?

  9. If an approval is conditional, and I don't accept the conditions, then I don't get the approval, right?

    But no decision has been reached yet. If they don't feel they can say "yes," this close to the election, and they can't afford to say "no," this close to the election, then maybe they'll have to negotiate. There are some smart people working on this matter. Our leaders, some of them, aren't as dumb as they look.

  10. From the above, I guess we can assume that the Ministers didn't like the British response? If the British require of Anguilla (as they did with the Caymans) real and deep cuts in expenditures, increases in revenue this year and next and an independent assessment of Anguilla's financial options for broadening the future revenue base, it's no wonder there were some unhappy Ministers.

    I also suspect that there isn't a lot of room (or time) for negotiations at this point. There aren't a lot of option - most of us learned a long time ago that "money doesn't grow on trees".

  11. Anguilla needs REAL political change. First, say goodbye to Colonialism and Britain.

  12. Interesting times, indeed, when St. Kitts becomes the budgetary paragon of the Caribbean...

  13. Foreign and Commonwealth Office

    Hon Cheif Minister


    Thank you for your letters of 14 September and 21 September which followed up your telephone conversation with Colin Roberts.

    I appreciate the efforts your government is making to address the issues I outlined in my letter of 27 July. I assure you that I consider each Territory's requests very much on an individual and case by case basis. However, I must act prudently when considering your request for additional borrowing at this time when Anguilla when Anguilla is already in breach of the agreed UK/Anguilla borrowing guidelines.

    I welcome the commitment you have made towards cutting public expenditure, including Public Service pay cuts. However, there have been less progress with plans to broaden Anguilla's revenue base. Is the absense of such plans, including details on how existing and any further debt will be paid back over the next 3-5 years and your planned changes to Anguilla's Taxation Policy, I cannot agree to your entire borrowing request.

    I am however, prepared to agree, exceptionally, to the government of Anguilla borrowing EC$20m to cover the recurrent deficit over the next six months, providing that you commit now to new revenue measures, no later than 2010-2011, to broaden your revenue base, as identified by an independent study to analyse the impact on public finances of a range of new taxes and initiatives. This study will be funded by the FCO with the terms of reference agreed jointly by the government of Anguilla and the FCO with a view to having consultants in Anguilla as soon as possible. I am ready ready to consider futher borrowing requests once we have discussed the findings of this study.

    However, given the particular circumstances of your requests to include provision to finance a proposed runway extension at Wallblake Airport I would be happy to consider that separately, once I have received a comprehensive business case which makes clear the impact of the reduction in the declared runway length and any consequent loss of revenue to Anguilla.

    I look forward to your confirmation that these conditions are acceptable to your government.

    Yours truly

    Chris Bryant

  14. The New York Times has a story this morning:



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