While the UBP’s proposed payroll tax cut for those earning under $42,000 is a nice thought, who does it really benefit? Does it simply punish the rich, reward the middle class a leave the poor behind? Is there a better way? One which could offer an evenly and fairly distributed approach that gives the most of the tax cut to those who need it, while not punishing as severely those who work hard to earn the most.
The UBP has proposed that they will eliminate payroll tax for those earning under $42,000 if elected. The core problem with such a suggestion is that those who stand to benefit most are those who earn closest to $42,000.
Here’s a quick example. Let’s say you only earn $20,000 a year. Cutting payroll tax at the assumed 6% that is usually borne by the employee would result in a savings of $1200 a year. Cutting payroll tax for those making $42,000 a year would result in savings of $2520. However, those making $70,000 a year would still be required to pay $4200 in tax.
Unfortunately, those lucky enough to earn $42,000 a year make out the best, but those unlucky enough to earn $43,000 get hit with $2580 in taxes. In reality, you’d have to make nearly $45,000 before you’d earn more than someone making $42,000 after taxes. Does that make sense?
What if there was another way, one which took a page from the fair tax proposal by attempting to distribute the tax cut more evenly across all Bermudians sort of like a rebate.
Lets assume for arguments sake that the UBP’s proposed tax cut would amount to the $120 million dollar difference between payroll tax colleted in 1998 vs. last year. Rather than doing it as a pure tax cut, continue charging the taxes but instead cut every Bermudian a quarterly cheque of their share of the savings. Using our example $120 million and dividing amongst a Bermudian population of lets say 50,000 people, that would amount to $2400 a year or $600 a quarter.
As we saw above, for someone making as low as $20,000 a year, a cut in the 6% would amount to a savings of $1200 a year in taxes. Yet, a rebate of $2400 would give them $1200 more over the course of the year to spend, greatly assisting their income.
For someone making $42,000 a year, that’d amount to $2520 in payroll taxes of which the rebate would give them back $2400 meaning they’d only really be paying $120 in payroll taxes for the year. Going back to that person earning $45,000, they’d pay $2700 in taxes but receive a rebate of $2400 netting them a total taxation of $300. For someone making $70,000 a year, that’d amount to $4200 in payroll taxes which would net them a total post rebate taxation of $1800.
Such a scheme would benefit the young and old, the homeless and the wealthy. The rebate could be offered in forms other than just cash in order to encourage community health and development. Examples such as redeeming your tax credit for health care, child care or education vouchers.
The plan could even be expanded to eliminate payroll taxes altogether and supplement it with an increase in consumption tax (duty). By this manner, people would be taxed purely on consumption rather than earnings which would take a bite out of those who live materially and spread the wealth amongst all Bermudians.
A tax cut for the poor is a nice thought, but given Bermuda’s wealth disparity, why reward those in the middle while punishing those at the bottom and the top? Rather than punishing the rich and poor to reward the middle class, could we find a better way? Could a fairer tax cut be introduced which could offer an evenly and fairly distributed approach that gives the most to those who need it while not specifically punishing those who work hard to earn the most?