Petty: Tax Service/Product Purchases, Not Payroll

August 6, 2013

Institute performance based pay in the civil service and replace involuntary direct taxes like payroll tax with taxes on product and service purchases, are some of the economy boosting measures suggested by David Petty, who ran as an Independent candidate in C#20 during the 2012 General Election.

Mr Petty said that taxing purchases rather than payroll is a “fairer taxation system which allows the burden of taxes to be borne by those who are willing to pay them.”

“This may reduce the cost of living for those who are currently unable to support themselves and may also indirectly reduce the drive to be supported by a nanny state, so potentially helping reduce the size of the civil service throughout successive governments,” continued Mr Petty.

The former political candidate made a total of five suggestions as part of his submission to the SAGE Commission, which he shared with the general public.

Mr Petty’s full submission is below:

1. Institute performance based pay in the civil service through the use of a Balanced Scorecard. I believe that we would much rather see all of the civil servants have an opportunity to earn than see them made redundant. No victims is my preferred approach.

2. Encourage voluntary attrition by offering multi-sector wide retraining. Also institute sector based education at the secondary and tertiary education levels, both technical and professional. We must educate our young to provide the levels of service and subject matter expertise that may be welcomed in the job market so that they do not require a nanny state to support them.

3. Repeal payroll tax and any other involuntary direct taxes in individuals or entities. Instead introduce indirect taxes on product and service purchases such as VAT. This is a fairer taxation system which allows the burden of taxes to be borne by those who are willing to pay them. This may reduce the cost of living for those who are currently unable to support themselves and may also indirectly reduce the drive to be supported by a nanny state, so potentially helping reduce the size of the civil service throughout successive governments.

4. Introduce mandatory venture capitalism equal to the repealed payroll taxes in point 3 for international businesses to provide funding support for local business cases, alike to the Dragons Den/ Shark Tank concept. Thus, all international business may be invested in local businesses (up to the 40% threshold), yet they may not be losing their funds to payroll taxes. This would provide a direct influx of foreign capital into local business creating enterprises which would be able to absorb the retrained civil servants and sector trained graduates created by point 2. It would also create a business angel relationship between local businesses and foreign experts who know how to create successful businesses.

5. This is perhaps the most useful proposal – use the $600m for years 2 and 3 of the well publicised $800m bond issue to wipe out the governmental deficit and refund the social pension scheme by investing the $500m into a reinsurance sidecar to be utilised by Bermuda’s top ten varied portfolio reinsurance companies to underwrite premiums to the value to $2.5 billion in year one. With a provided for 20% loss to claims during the first year alone that would be a return of $2 billion. Taking let’s say $1 billion out of the portfolio to service paying down the government debt would leave $1 billion as capital to write premiums against in year 2. If prudently invested across multiple lines of reinsurance by the best underwriters in the world, which happen to be based here in Bermuda, this must be our country’s best option for not only clearing the pubic debt, but also to create an ongoing governmental revenue stream that would mean that we do not have to privatise essential public services to the lasting detriment of Bermuda’s people.

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Comments (20)

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  1. Jus' Askin' says:

    Suggestions are Good. I only agree with ’5′though ;-)

  2. frank says:

    petty this is why you did not get elected

  3. S Smith says:

    Suggestion #5 doesn’t make sense. If it were that easy to quadruple your money, everybody would be doing it.

    • David Petty says:

      There is a requisite monetary level of entry into this market to cover claims. I believe it is $2m, however I welcome correction. It isn’t easy, it requires underwriting expertise, and those who are capable are doing it. Just read the business section to see the profits being generated by the big reinsurance firms. Given that we have this capability in our own back yard we should be taking advantage of it.

      Some times the most obvious solutions are overlooked due to their simplicity.

  4. Triangle Drifter says:

    Imagine how many customs jobs could be eliminated if #3 were implemented. Lots of cushy jobs would be gone. Imagine how much less things would cost because retailers would not have to finance the duty cost of items between time of importation & time of sale.

    We already have basically a consumption based tax system, a good thing, but it is woefully inefficient. How many millions go to Customs salaries when tax can be collected automatically at the point & time of sale?

  5. Sorry Sir says:

    #3 is a fantastic idea.

  6. What do you say about the additional costs and burden on Government to manage and administer a VAT regime? How does this factor
    into your costs savings? Also, have you passed any of these ideas onto the SAGE commission?

    • J Starling says:

      I think you will find, on rereading the article, that these are his submission to the SAGE Commission.

      I take it as hoping to inspire some conversation on these issues (beyond SAGE) and to encourage others to also submit ideas before the deadline expires tomorrow.

      • David Petty says:

        Absolutely! Thanks for pointing that out Jonathan.

    • David Petty says:

      Reducing payroll tax and customs and perhaps some of the other 28 or so tax administration burdens paid in Bermuda, i.e. balancing and streamlining to VAT may well lessen government’s overall administration burden. Where do you get the idea this would increase the burden? Have you actually investigated this. Are you aware that you may be off the mark.. by a long way?

      And yes, I have submitted these ideas to SAGE… that was the point of the press release. Tomorrow is the last day. Please submit your own ideas by then. This is your chance to have a say.

  7. Ride says:

    My concern with item 3, introduction of VAT, is two fold:

    Firstly it is a consumption tax and as such always ends up consuming more of the low-earner’s income than the high-earner’s income. For example, say the VAT on food is 3% and a low-earner makes $500/week and a high-earner $2000/week. If both by groceries of $150 before tax then both pay $4.50 in VAT. However, $4.50 is 0.9% of the low-earner’s income. While $4.50 is only 0.23% of the high-earner’s income. So the low-earner end’s up being taxed a higher percentage of his/her income. Notice that is the same way that the current tax scheme of Customs Duty works. It too is a consumption tax so for the same purchase of goods and services at the same price the low-earner sees a higher percentage of his/her income go to taxes. Why replace what we currently have with something that has the exact same characteristics.

    Secondly, a post sale tax scheme like VAT requires a swarm of government employees to police, manage, and audit. Companies would have to monthly report on all their sales and how much items were sold for. They would also have to account for inventory not yet sold so that the government knows that things aren’t being sold on the side without VAT being paid. Companies would also have to account for services sold as well. What about the vendors that popup on the side of the road from time to time (snowcones, t-shirts, …)? These people would also have to report on the sale of goods and pay VAT. We are talking a Bermuda IRS type setup. This is expensive. You can’t use the Customs Duty employees because they still need to check process in incoming goods. Post sale schemes are very expensive for governments and Bermuda doesn’t need this because it already as a pre-sale scheme that is much cheaper to operate. Also, you can’t have both VAT and Customs Duty; that is double taxation. You’ll be paying duty on the item plus tax for the total cost of the item and that cost has duty in it. So you’d be paying tax on the cost of the actual item and on the duty paid. That is just crazy.

    My concern with item 4 who will be directing the investment of the capital? Who will be vetting the proposals for viability? Who will be examining the management of these proposals for competency? Who will be assessing the completion and quality of milestones for drawdowns of the investment plan? You can’t just sprinkle a pot of money over an idea and have it bloom into a successful business. The detail devils are always lurking.

    Ride

    • David Petty says:

      Firstly, I agree – the devil is in the details. My proposals are conceptual and the details would need to be further developed and analysed prior to making commitments on them.

      A point of information I should mention is that I happen to have previously worked for KPMG, PwC and a tax software company called Sabrix as a Tax Management systems expert.

      Regarding your grocery analogy – that is somewhat off the mark as groceries are necessity items and so would not be subject to VAT. VAT as I mentioned in my submission to SAGE should be on voluntary purchases, i.e. luxury items. Groceries, text books, children’s clothes, prescription medications are generally exempt from VAT in most countries. The point of VAT is to target voluntary/luxury products and services which by their nature have more spent on them by the richer folks.

      Another consideration is that double taxation is not acceptable in most western countries regarding VAT vs duty. Hence the term, “double taxation relief”. VAT should be introduced with a reduction in unfair duties which target product sellers as opposed to service sellers. Duty is wholly unfair whereas VAT fairly taxes both at the point of consumption.

      I’m afraid that your points are coming across as scaremongering when you clearly are ill-informed on the subject. May I ask that you submit your own proposals to SAGE before the deadline tomorrow. Then the Commission can evaluate all of the submissions equally.

      Tomorrow is the last day to get your submissions in. This is not about politics, this is about people in Bermuda having their say before their time is up to do so.

      If you have a better idea – please submit it!

      • Ride says:

        @David Petty

        No scaremongering was intended. I was merely voicing my concerns as I understood the proposals and you have provided a reasonable response to some.

        Note that the VAT details in the article (purported to be your full submission) makes no distinction between necessities and luxuries. The groceries can be substituted for a motorbike or pillows. The point here being who determines what a luxury is; more detail devils. Also, as I understand, the complexity of a VAT scheme increase with the number and types of exemptions.

        You’ve not addressed the concern of cost for setting up and running the VAT scheme; purchase and integration of hardware and software systems, new hires, marketing and information, training, policing, accounting forensic investigations, and on and on. Consider that government is trying to reduce its costs and employee footprint and it appears that the VAT scheme would be a significant move in the opposite direction while, as I understand your submission, not providing any increase in revenue.

        Additionally, it is my understanding that the complexity of a VAT scheme increase with the depth of the taxable supply-chain. Such that if a provider business sells to consumer business a good or service that the consumer business will sell on to another customer than the consumer business does not pay VAT. Only the end customer does. This adds more accounting and report and compliance checks and so on to the mix. More expense for the businesses and the government. It seems reasonable to believe that the government would cover this expense with an increase in taxes and the business, with an increase in prices. Not the desired direction.

        I’m not certain where the “This is not about politics” comment has originated from. I’m not a political character and have made no reference to any political themes. You’ve put yourself out there for Bermuda to have a say and I, as a Bermudian, am having a say.

        Respectfully,

        Ride

        • David Petty says:

          Your points are certainly valid and I encourage you to make a submission to the SAGE commission.

          There would certainly be a change programme required, just as there will be a change programme required for all of the SAGE proposed changes. The real question is will the returns from a VAT move outweigh the costs. I happen to believe, based on my experience of seeing VAT implemented in other jurisdictions, that it would. However without further analysis of a fit for purpose move to VAT feasibility study for Bermuda, I cannot confirm such.

          I do believe however, that any move should have a threshold for entry such as in other countries. When I was in the UK the threshold was a turnover of GBP 56k per annum. In other words you could opt out of registering for VAT returns if your turnover was less than GBP 56k p.a. I believe the alternative option was to pay a flat 12% VAT for companies who wished to do so.

          Such an option could be possible here in Bermuda as well to reduce the burden of submitting complete VAT returns for smaller companies.

          Either way your assumption that VAT may cost more than it is worth is not an opinion I share based on my personal experience, but without a Bermuda sensitive feasibility study neither of us will be any the wiser… but then again that’s why I made the submission.

  8. Sailor says:

    DREAMER!

  9. Y-Gurl says:

    Here we go again, another stupid idea to get yourself in the spotlight, Petty you made such a big deal of telling us who you had worked for and all the people you had “advised” the part you left out was how many people took and implimented your ideas or even took you seriously. VAT instead of payroll tax, firstly do the numbers and you will see like in other jurisictions VAT alone could not replace that revenue and only goes further to upset the economic balance in the community. We already pay a huge burden of consumption tax in the form of duty, just look at your light bill or the $3.00 gallon of gas thats taxed to almost $9.00 and you want to add up to 20% on top (thats where it will go to)

    Its a stupid and non reversible tax which in years to come would be suplimented by a similar to payroll tax which would be introduded as a new idea and drives the cost of of our already overtaxed consumables up.

    • David Petty says:

      My experience which you so quickly dismiss, has led me to different conclusion. However, if you believe you have better ideas, then I suggest you submit them to the SAGE Commission before the end of the day.