Lowering taxes can improve economy

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  • Kevin Comeau

    Kevin Comeau

This is the second and final part in a series by Kevin Comeau on how Bermuda can best stimulate its economy

In most countries, the businesses that are the main drivers of the economy usually don’t have the economic mobility to simply get up and leave the country if the government raises taxes.

For instance, if the US Government were to raise taxes, it may cause a slowdown of the economy, but it is not going to cause the majority of American companies to simply get up and leave the country. Conversely, a decrease in American taxes may cause an increase in economic activity, but it’s not going to cause the number of businesses operating in America to double in the next year or two.

That’s because most businesses in America need to be in America to conduct their business. (Yes, outsourcing can reduce that need, but for many businesses, outsourcing to other countries is not possible, e.g., shale oil production, grocery stores, railway transportation etc) So an increase or decrease in taxes may affect the amount of business they do, but it usually will not affect their decision to remain in the country. For the most part, they just have to suck it up and accept the reality of higher taxes.

In Bermuda the opposite is true. An increase or decrease in taxes has a direct effect on whether the main contributors to its economy — International Companies — stay or go. That’s because these companies sell their products and services to customers who are located outside of Bermuda, and therefore there is no intrinsic need for them to be in Bermuda to conduct their business — they can just as easily service their clients from Ireland, Switzerland, Cayman or any other low tax jurisdiction.

That makes tax rates in Bermuda a double-edged sword that can be swung powerfully in either direction.

In the same way that these types of companies have the operational freedom to move jobs from Bermuda to more tax-advantageous countries, they also have the freedom to move jobs from other countries to Bermuda if Bermuda were to offer more competitive tax rates, particularly lower payroll tax rates.

So if Bermuda wants to stimulate its economy, one of the most effective ways to do that is to reduce payroll tax rates for IB companies to the much lower levels that prevailed before the PLP dramatically raised them.

But the Government must be careful about how it structures its tax relief because, while it would be nice to give all businesses in Bermuda a tax break, the present high national debt ($1.5 billion) makes that difficult if not impossible to do without causing the debt to further skyrocket.

Realistically, the Government can only afford to give tax relief in targeted areas, and so it should target the industry that gives the biggest bang for its tax stimulus buck. That means targeting tax relief for International Companies because, unlike most local companies, they can generate jobs not just in their own industry, but also in many other sectors of the economy.

For example, offering lower tax rates only to local companies will generate only a minimal increase in long-term growth and jobs, while offering lower tax rates only to International Companies should significantly increase long-term growth and jobs.

That’s because a large majority of Bermuda local companies derive their revenue either directly or indirectly from International Business. If International Business is not expanding, then these local companies will not significantly expand their businesses, and no amount of tax relief is going to change that.

Conversely, if tax rates were significantly lowered only for IB companies, it would not only stem the flow of exiting IB companies, but it would also make Bermuda much more attractive to new IB companies. The resulting increase in IB operations would not only increase the number of Bermudian jobs at the IB companies, it would also increase the number of Bermudian jobs at the local companies that directly and indirectly provide services to IB.

In other words, lower tax rates for IB companies would increase the number of Bermudian jobs at International Companies (e.g., insurance companies, captive management companies, mutual funds and fund administrators) which would increase the jobs at the local companies that directly service the IB companies (e.g., law firms, accounting firms, computer companies, office supply companies) and the jobs at local companies that indirectly service the IB companies (e.g., retailers, restaurants) as well as increase the incomes of the individuals who provide services to the IB workers (e.g., landlords, taxi drivers) and the charities that receive donations from IB (basically all charities in Bermuda).

This additional economic activity at numerous levels of the Bermuda economy would also increase future Government tax revenues giving Bermuda a five-layered positive effect from the lowering of IB tax rates. No other sector of the Bermuda economy can respond to tax reductions anywhere near as powerfully as the IB sector.

The dire state of the Bermuda economy, with high unemployment and high national debt, requires prudent governance to guide it forward. By carefully wielding the sharpest, most powerful weapon in its arsenal — lower tax rates for International Companies — the new OBA Government can generate new jobs and higher incomes in multiple sectors of the economy.

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Published Dec 24, 2012 at 8:00 am (Updated Dec 23, 2012 at 8:08 pm)

Lowering taxes can improve economy

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