Local economist Craig Simmons doesn’t support a “living wage”?

Despite being featured prominently in the image caption for the Royal Gazette’s “Calls for a living wage in Bermuda” article, I noted with interest that it local economist Craig Simmons doesn’t seem to actually support the concept of a “living wage”.  The three options he does support are quite a bit different which makes it ironic how he is featured with the headline. Ultimately Mr. Simmon’s options help outline why a minimum or living wage can be a poor option economically while there are viable alternatives that would achieve the the same goals.

First off it is important to understand what exactly a living wage is.

A living wage is defined as the wage that can meet the basic needs to maintain a safe, decent standard of living within the community.

Certainly a noble aim. However, a “living wage” limits the scope of the goals to only providing for a decent standard of living through means of a wage which leaves anyone who is not fully employed caught short. There are also many arguments to be made about the negative economic impacts that a living wage or minimum wage can have.  A living wage acts as a tax on employers of low skilled workers and would actively disincentivize low skill job creation in Bermuda’s economy.  Bermuda’s economy is not like others and too many fail to realize that concepts that may work elsewhere won’t work here.

With that in mind a prudent individual should recognize that while economist Craig Simmons does seemingly support the goal of providing individuals in society with means to maintain a decent standard of living, he doesn’t suggest a minimum or living wage as a means to do it. None of the three options are wage minimums and economically that makes a huge amount of difference.

The article notes:

Turning his attention to the concept of a living wage, he said there were three options, including establishing a guaranteed income, creating a wage subsidy, or a cash transfer scheme.

Let’s cover each of these.

A cash transfer scheme is the concept of directly providing cash to eligible people.  This already exists in the form of financial assistance and could be expanded.  The big problem with financial assistance as it exists today is that the means testing used can discourage employment and can encourage abuse. We’ve already covered the example of people on financial assistance acting entitled to costly and unnecessary brand name medications. There are other examples such as financial assistance penalizing those with minor incomes encouraging them to stop working to get full benefits because no supplement is offered.

A wage subsidy moves a little closer to the mark.  Rather than penalizing employers with a minimum the government provides assistance with wages to help raise them.  It could be achieved through cash support to boost wages or through a negative income tax. A negative income tax is an extension of a progressive tax system where people earning below a threshold are paid money from the government rather than paying taxes.  While this is an improvement and reduces the negative economic disincentives related to a “living wage”, it adds complexity and only assists workers.

The third option Mr. Simmons outlined is a guaranteed income.  Also known as a basic income, a guaranteed income is a concept this writer first advocated 10 years ago.  It is defined as a scheme in which “all citizens or residents of a country regularly receive an unconditional sum of money”.  The purpose is simple, reduce bureaucracy and complexity and provide an unconditional cash stipend that can act as a rising tide to lift all levels of society.  It lacks the complexity of progressive taxation schemes and reduces the burden financial assistance so only those in genuine need can achieve help.  Economically this is far more fundamentally sound as it can be funded through more equitable flat taxation schemes that don’t unfairly punish employers who rely on low skill work.  It puts cash in the hands of everyone, not just workers.  People like the elderly, disabled, and children would all get a basic income.  Entrepreneurs would be encouraged rather than punished. It would incentivize job creation by making employing people cheaper and open the door to more part time work opportunities, lowering the cost barriers for lower skilled work. Exactly the opposite of a living wage which penalizes many for the benefit of workers.

The goals behind a living wage are noble ones though economically they just aren’t feasible.  Mr. Simmons’ has outlined 3 better options that are more economically feasible. A guaranteed income being the most promising of the options.  It is ironic and rather sad that Mr. Simmons’ has been featured in way that makes it look like a “living wage” in its defined form would be a good option for Bermuda.  It simply isn’t but that doesn’t mean there aren’t viable alternatives we should be considering.

What’s wrong with a progressive payroll tax?

 

“I am now convinced that the simplest approach will prove to be the most effective — the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income” – Martin Luther King, Jr

 

One of the topics mentioned in the Throne Speech was the introduction of a progressive payroll tax.

One of the keys to the continued recovery in 2017 will be the introduction of a progressive payroll tax to “ease the pressures on lower income earners.”

This is one of the topics that both parties are in support of that I think takes us in the wrong direction.  I’m firmly of the believe that rather than introducing a progressive payroll tax, Bermuda should pursue some form of an unconditional universal basic income.  I’ve previously written about it here and here and it is actually a concept I’ve been advocating as an alternative to tax cuts since way back in 2007.

Am I crazy?  Maybe.  The thing is in the last few years I quit my job in international business to become an entrepreneur.  It was a big risk which meant years of not paying myself and even now only making a fraction of what I used to.  I am lucky in that I was provided the opportunity for a good education and was willing to put in the hard work and make sacrifices. Most people aren’t as lucky.

The problem with tax cuts for low income earners is that it is like that old adage, “Give a man a fish and you feed him for a day, teach a man to fish and you feed him for a lifetime”.  It may help someone live a little easier but it doesn’t help if they want to take time off working to retrain for a better job or start their own business.  A universal basic income, basically an unconditional monthly payment provided to all residents, enables more opportunity than a tax cut.

 

Reviewing opinions on the throne speech

Today’s Royal Gazette has a number of opinions from PLP ministers and political commentators on what they’d like to see in the upcoming throne speech.

On employment, Mr Brown told The Royal Gazette: “It is not the Government’s responsibility to create jobs, but to create the appropriate environment for quality jobs to be created.”

Mr. Brown is spot on here.  It is the government’s responsibility to create an environment for jobs, not create jobs themselves.  Speaking as someone who recently formed a business it is insanely difficult to form and do business in Bermuda, there is far too much bureaucracy and too many barriers. If we want to create jobs we need to reduce bureaucracy, costs and other barriers.

There had been “nothing” in the last four years on generating quality jobs, he said, which had “deeply affected” people enduring years of hardship.

While I think it is fair to say there hasn’t been enough done to create an environment that generates quality jobs, I think it is unfair to say nothing has been done.  At minimum, America’s Cup’s investment in the island and the improvement in tourism is creating some jobs. It is interesting no ideas were suggested as to how to generate jobs.

“We cannot have a healthcare system that is fundamentally driven by maximising profits. That is a recipe for increased costs. We need to adopt an approach close to what you see in many European countries, where healthcare is seen as a basic right — not a privilege. If they don’t do it, the next Government will have to.”

A key problem we have is that our system is incredibly inefficient, has no accountability and is driven by monopolies.  Speaking with an insurance rep I was told that BFM no longer offers “public” or “semi-private” insurance coverage.  The reason being? The new hospital was designed such that effectively all rooms are private.  Why?  It isn’t necessary and drives up costs.

When I had an accident a few years ago, I spent 5 days in the hospital.  I’ve been told that in Canada I would have been sent home after 1 day and had a nurse come around to my house to administer my drugs for the same injury.  Our model has horrible inefficiencies and it doesn’t look like there is clear accountability on costs.  Costs are passed on so the end user only sees increasing insurance bills. There is little to no transparency on where costs come from and seemingly limited review on cheaper alternatives.

Mr Perinchief said that the setting of interest rates needed to be wrested from private financial institutions, and into the hands of a government central bank.

Frankly I think a central bank is going in the wrong direction.  More bureaucracy. Instead, we should eliminate the Bermuda dollar and its associated currency risk. There are numerous countries that use the US Dollar as their official currency. This would eliminate the “Bermudian tax” that is placed on all conversions of Bermuda dollars to USD.  Subsequently, make it easier for foreign institutions to offer local loans in USD and we’d effectively end up with interest rates closer to USD.

Finally, he suggested examining a flat rate tax on international companies in the range of 0.5 to 2 per cent across their bottom line levels.

“We have the Googles in this country making millions if not billions — that won’t hurt them.

I can only shake my head at the suggestion of taxing international business profits.  The reason these companies are here is because we are a competitive tax environment.  If we add corporate taxes, we will no longer be competitive and companies will simply move to whoever is.  We need to be more creative then that. Companies who directly or indirectly create jobs on island are worth welcoming, however “brass plate” companies like Google give us a bad name and it is questionable how many jobs they create in legal and banking fees. An option would be to require traditional “brass plate” companies who have no presence on island to demonstrate that how they contribute to employing X number of employees on island either directly or indirectly based on their size or profits.

A system of proportional representation would also be of benefit, with a shift from the “first past the post system” that encouraged political polarisation.

No argument there.  Our current system does not work and leaves many disenfranchised.

Rolfe Commissiong, PLP backbencher and chairman of the Joint Select Committee on the establishment of a living wage, agreed to prioritising a living wage while reducing the disparity between blacks and whites.

A living wage is a terrible idea and would hurt small business and entrepreneurship the most. I’ve written before about my beliefs that we should instead unify the duty system to a single rate and use a portion of the proceeds to fund a universal basic income and another portion towards paying down the debt.

Speaking of a brain drain of young, black Bermudian talent leaving the island, Mr Commissiong added: “We need to see the sort of policy and legislative prescriptions, not only by this Government but the next Government as well, that will reverse this trend and make Bermuda attractive not only for foreign investors but for growing numbers of Bermudians who feel they can no longer afford to live here.”

Speaking as a young Bermudian of mixed racial heritage who has spent most of the last 4 years off island, the biggest problem is lack of opportunity and barriers we create for returning home.  I left due to a lack of opportunity and the decision that I would create my own. Returning home is a much larger challenge than I anticipated and I’m still not certain that I will manage.

There are many barriers to returning to the island that make it incredibly difficult. Costs are incredibly high. Opportunity is limited. Finally, we pay a lip service to putting Bermudians first and investing in Bermudians but in reality it doesn’t happen. The worst part is that it isn’t limited to international business. Bermudians and Bermudian businesses are more interested in working against each other than working with each other.  We are fighting amongst ourselves, holding each other back and frankly pointing the finger of blame at anyone and everyone else.

 

A living wage would be a mistake, create a universal basic income instead

There has been some talk of the introduction of a living wage in Bermuda.  That would be a mistake.  A living wage, or minimum wage puts a heavier burden on businesses that already struggle to employ people at the bottom rungs of society.  It adds more complexity, bureaucracy and oversight in order to ensure it works.  It has a risk of eliminating jobs and increasing costs rather than creating jobs.  A better proposal would be to introduce a universal basic income.

Let’s use a simple example considering the recently announced 1% tax hike.  Assume you have 10 people, one who makes no money and then each subsequent person earning $20,000 a year more than the previous person.  In total, they would earn 900,000 a year in income.  A 1% tax would equate to 9,000 a year in tax revenues.

Take that $9,000 a year in tax revenues and redistribute it equally among the 10 people. Each person, universally, regardless of means or earnings would get $900 a year, or about $75 a month.   The person who is unemployed gets $900 and pays no taxes because they have no earnings.  The person who makes $80,000 pays $800 a year in taxes but effectively gets an extra $100 a year via the basic income.  The person who makes $100,000 pays $1000 a year in taxes and thus effectively pays $100 in taxes.  The person who makes $180,000 pays $1800 a year in taxes, gets the same $900 basic income as everyone else and thus really pays $900 in taxes.

The benefit is that this creates a progressive tax system without the complexity.  Everyone pays the same flat 1% regardless of their earnings.  Everyone gets paid the same universal basic income amount annually or monthly regardless of earnings.  It is a simple to administer tax system with very low overhead. In exchange, it opens the door to eliminating most and hopefully all of the social nets with complex means testing and bureaucracy.  There’s no longer any need to create special tax reduction incentives or social programs for the people with low or minimal income.  That reduces bureaucracy and allows us to reduce the size of the government necessary to manage it.  This puts more people out into the workforce who can subsequent their basic income with full or part time work.  It reduces overhead on businesses and eliminates the need to force businesses to pay a “living wage” and allows them to attract people on the basis of working to supplement their basic income. The more people brought to the island at the high end of the pay scale the more money flows into the basic income pool.  As they say, a rising tide lifts all boats.

In Bermuda’s case, it would make a great deal of sense to apply this to the duty system to disincentivize frivolous consumption.  A flat 25% duty rate would mean someone who buys a $100 t-shirt pays $25 in duty.  Someone who buys a $10 t-shirt pays $2.50 in duty.  Each would get a basic income of $13.75 as a result and thus the $10 purchaser has their purchase subsidized while the $100 purchaser pays a more progressive tax.

If you took 10 different shirt purchases, each $10 more than the previous and charged 25% duty on it, you’d collect $137.50 in duty from those 10 purchases.  If you then divided that duty amongst the 10 people as a basic income, each person would get $13.75.

The individual who purchases a shirt for $10 + $2.50 duty would have gotten $13.75 in basic income.  This means that the person would effectively have $1.25 left over from their basic income to spend on something else, perhaps some food.  The person who bought a shirt for $50 + $12.50 in duty would have paid $62.50, but after their $13.75 basic income is applied, the shirt would actually have cost a net value of $48.75, leaving them $1.25 to spend on something else.  The person paying $60 + $15 duty would have paid $75 in total, which after considering their basic income would amount to the shirt having a net cost of $61.25.  This means they would have paid $1.25 in actual duty expense.  The person buying the $100 shirt would pay $25 in duty, which after their basic income would net them a total cost of $111.25, thus effectively paying $11.25 in duty.

The purpose of this is to again create a progressive taxation system without the complexity.  Rather than a crazy 460 page tariff program that is a nightmare to administer, you replace the entire thing with a flat duty rate.  You take a portion of the proceeds and use it to create a basic income that helps subsidize lower cost items, mainly essentials for the poorer elements of society.  The poorer elements of society are more likely to put any savings directly back into the economy which helps fuel more economic growth and create more jobs.

In an ideal case we’d aim to streamline and eliminate government bureaucracy by reforming our tax systems to a flat tax structure and using the proceeds to create a universal basic income.

Universal basic income

For those who follow it, Ontario, Canada has now announced that they’ll join Finland and The Netherlands in doing a trial of a universal basic income while New Zealand is considering it.  This blog has been hinting at the possibility of a universal basic income as a possible answer to some of the island’s problems since back in 2007.

The basic premise of a universal basic income is to give a guaranteed income to all citizens/residents with no conditions attached.  Every individual gets a monthly payment from the government with no requirements for how it is spent.  In exchange, social benefits like welfare, housing, social security etc are phased out and eliminated.

One of the big reasons that a universal basic income is an attractive idea is that it greatly simplifies things.  Governments have gotten far too big, complex and expensive.  Around the world civil services have grown to unsustainable sizes trying to manage a complex myriad of programs and services.  The trouble is that this leads to a great deal of administrative overhead that burdens the productivity of a society.  A basic income is an opportunity to streamline government inefficiencies, eliminate waste and remove excuses.

People mistakenly think that a basic income program encourages people to avoid work.  Instead, it has often been shown to do the exact opposite.  It provides a rising tide that lifts the income security of all individuals.  It reduces the risk associated with entrepreneurship and encourages more business growth.  It puts more money in the hands of the poorer elements of society who are quick to put it back into the economy.  It eliminates attempts to game the system and expectations of handouts.  It encourages people to do more to supplement their basic income with part time and full time work.  Overall it does more to encourage work and economic growth rather than discourage it.

The trick to a universal basic income is that it needs to be universal.  No conditions, no bureaucracy, no complexity.  In the ideal case, every individual gets X a month, rich or poor.  In turn, every individual pays the same percentage of taxes.  Effectively this creates a progressive taxation system without the complexity of a progressive taxation system.

In Bermuda’s case, there is a great deal of merit in flattening the duty system to penalize consumption of imported goods and use that to fund a basic income.  While other countries are heavily reliant on a consumer element as the lifeblood of their economy, Bermuda’s economy is different.  A large portion of every dollar spent on goods is sent off island.

Bermuda is far too consumption driven as we have a very high cost of living but also high earnings and thus a high disposable income in comparison to other countries. Bermudians have some of the highest percentages of tv, cellphone, computer ownership on the planet.  Home ownership however is far out of reach for a great many.  It is far too easy to consume and discard as it is unrealistic to afford a future.  Bermudians aren’t known for repairing and making things last.  Too often we toss it and get another.  We shouldn’t be encouraged to live like that.  Our tax system could encourage more investment in making things last and create jobs around making it a reality.

How could we do it?

  • Eliminate work permit requirements for skilled positions traditionally unfilled by Bermudians
  • Reintroduce furlough days
  • Flatten the duty system for everything except cars at 25%
  • Use the proceeds to create a basic income with a portion going to paying off the debt.

Since Bermuda produces almost nothing, a good pairing would be to simplify the duty structure towards a single higher rate and use the proceeds to fund a basic income.

It will be interesting to see how these three basic income experiments work out.

We need to cut bureaucracy, not add to it

From today’s paper

Mr Simmons also recommended an increase in taxes — including incorporating a value added tax (VAT) on all goods and services.

 

“From everything from dentist visits to restaurants,” he said. “What that does is broaden the tax base from $1 billion to as much as $2 billion. VAT is a more efficient way to tap into economic activity. Shared sacrifice should require people selling goods and services (to) pay.”

 

He also offered the idea of a corporation tax. The model in Bermuda, he explained, is that corporations are taxed on size and type of business, not profits. “That is something (the Government) is going to have to deal with.”

Normally I agree with many of Economist Craig Simmon’s opinions, this time I completely disagree.  A VAT tax would be a disaster, as would a corporation tax.

A VAT tax while nice in theory is incredibly difficult to implement.  Just ask the Bahamas.  They’ve been planning a VAT implementation for some 5+ years and have required the expertise of some of Revenue Canada’s top consultants.  Bermuda doesn’t have 5+ years to figure out how to implement a VAT tax.

A corporation tax?  Wait, the absolute last thing we want to do is actively using taxation to discourage businesses of a certain “size”.   I would however wholly support increased fees or taxes for any non-Bermudian owned “brass plate” entities with no physical presence other than a mailbox.  They do far more damage to our reputation and good and we could at least look to these as a source of revenue.

If we want to cut government size and costs we need to cut bureaucracy, not add to it.  One thing we could be doing is simplifying the duty system into either a fair tax or a vastly simplified tier system.  It is far too complex with a great many concessions which don’t make a great deal of sense.

A fair tax cut

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?