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When is a tax not a tax?

Bermuda has taken its share of hits in the US press over the last year, particularly, with respect to the oft quoted statement, “that we have tax-free status”. As you and I know only too well each time we stand in line at airport Customs to pay our share of consumption tax, or stand in line to purchase our groceries, this is simply not true.

How do we compare to other jurisdictions in the amount of tax assessed per individual (adult)? It is well known that the United States, UK, some European countries and Canada have pretty onerous tax structures, tiered under various schemes that purport to be progressive in nature. So progressive that UK rock stars (paying the highest incremental tax of all their earnings) often left the White Cliffs of Dover for other tax neutral (and warmer) shores. In the United States, we mean that tax is computed in increments of earnings, i.e. the first $12,000 is taxed at ten percent, the next increment above $12,000 to $47,000 is taxed at 15 percent, the next tier of earnings above $47,000 is taxed at 27 percent, and so forth. Tiering income thresholds for taxation does mitigate the effects of a tax on lower income wage earners; the theory being if you earn more you should pay your fair share (more).

Flat versus Progressive Taxes. Most of the taxes (tariffs, stamp duty, etc.) assessed in Bermuda are not progressive, although voluntary conveyance of property during life and Estate Stamp Duty at death are calculated on a sliding scale. When taxes are not progressive, those in modest wage earning brackets pay a higher proportion of their income every single time. Sales taxes, also considered flat taxes, are assessed in various jurisdictions, i.e. New York State, more specifically on luxury goods as opposed to necessities such as groceries. The philosophy behind a sales tax is that those into excess consumption can pay more, or if it is not a necessity, don't buy it. In Bermuda, the only way to minimise a flat tax burden is to purchase less, pretty difficult when trying to feed, clothe, and house a growing family.

What are some of our real taxes? All wage earners are assessed a payroll tax and government pension deduction which amount to an estimated 6.25 percent of the combined $80,000 wage earners in our illustration; not much different than the social security tax of 7.5 percent assessed in the United States. And there are many others: Land Tax based upon an ARV - annual rental value, even if you don't have a rental unit; those families who rent are absorbing part of the land tax in the rental charge. There is Stamp Duty on every piece of paper that changes hands. Everything else that walks, flies, sails, motors, rows, and parachutes into Bermuda, is assigned a tariff charge upon arrival, it seems.

Tariffs and Taxes. Her Majesty's Bermuda Customs now has the tariff list on line. A review of this massive tome (347 pages) is particularly fascinating; human hair pays duty of 22.5 percent while eels only five percent; goats and sheep appear to be duty free, but electronics are taxed at 33.5 percent. Doors and Windows are taxed at ten percent, while school supplies are at 22.25 percent and children's colouring books at 33.35 percent. Does this mean that making your home secure from the elements is more important than education? In some cases, there appears to be no rhyme or reason for the differences. Soap is taxed at ten percent, deodorant and toilet tissues at 22.25 percent, but disinfectant is duty-free thereby leaving one to think that if we want to truly economise perhaps cleansing thoroughly and splashing on disinfectant will suffice.

How do we translate these various tariffs, duties, and taxes to a per-individual charge? Not an easy task, and ripe for criticism and speculation. I welcome it all; any comments from readers on this subject would be appreciated. We start by making some assumptions; don't expect these to be accurate to the penny. Further, our composite average household expenses in The Bermudian Chart numbers were based upon estimated wholesale costs of various average household budgetary items. Vehicle tax is based upon average holding life of the car; conveyance stamp duty taxes were pro-rated based on living in the home twenty years. Groceries at retail of $10,000 per year were assumed to be taxed at wholesale landed cost of $7,000, gas and electricity surcharges had to be conservatively estimated, and so on. At the end of the exercise, our average Bermuda resident family spends approximately 14 percent of their gross income on tax on living expenses and 6.25 percent on payroll tax and government pension for a grand total of about 20 percent, annually.

When you add in the incremental cost of financing here (a conservative two percent higher) as opposed to the cut-throat competitive mortgage rates in the United States and the UK (one year Adjustable Rate Mortgages currently at about four percent: source Bloomberg), the competition cost added to the ordinary tax cost of living jumps to 26 percent.

There will be those who may differ with these assumptions and computations, but the conclusion remains the same. Bermudian residents do pay a significant portion of their incomes in taxes, and the rates are not progressive. Those with modest incomes have a much larger tax ‘bite' taken out of their earnings every year.

It is said that one can never avoid death and taxes. The resident of Bermuda pays taxes, just like any other jurisdiction. I challenge anyone to call our nation a tax-free haven.

@EDITRULE:

Martha Harris Myron CPA CFPr is a Bermudian, a Certified Financial Planner™(US license) practitioner and VP, Personal Financial Services at Bank of Bermuda. She holds a NASD Series 7 license, and formerly owned a US financial services practice meeting the needs of 400 individual and corporate clients.

Confidential Email can be sent to marthamyron@northrock.bm

The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda. Under no circumstances is this advice to be taken as a recommendation to buy or sell investment products or as a promotion for financial plans. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.