Political will needed to fix broken model
“The Bermuda model is broken”
— economist Robert Stubbs
“But if we called it income tax instead of payroll tax we could deduct that from our US income tax. And Bermuda would have an income tax and get everybody off our back. Just a little measly 4 per cent would get us out of that ‘no tax jurisdiction bucket’.”
— Brian O’Hara, former XL chief executive
For more than a decade, Brian O’Hara was a stealth sponsor of the Cup Match Classic Safe Hands Award — unbeknown to most until now. He signed up during my launch of the Cup Match-associated award scheme in 1998 through my company and insisted that his public recognition as a sponsor was not necessary. He simply wanted to give something back to Bermuda because he knew how much Bermuda had given him, and this was but one way for him to do so.
He has always been a great friend of Bermuda and I have grown to value our friendship. By the way, the Safe Hands Award is now more than two decades strong. So thanks, Brian. You helped make that possible. And I am sure that three-times winner Janeiro Tucker will echo my comments.
I write this because the launch of his book, It’s not the Score, it’s the Trip, and his comments in the newspaper some days ago provide another opportunity for him and I to have the type of conversation about the major issues of the day that we have always indulged in. It began from that first meeting between us in the old XL headquarters on Victoria Street back in the mid-1990s — except this time it’s taking place in public.
Frankly, I was very pleased that he broached the issue of income tax, particularly that of the adoption of corporate income tax for Bermuda. Along with a tax on dividends as contemplated by the Government, there may be a hope that this third rail of Bermuda politics may lose its power to turn most politicians into rank cowards, under the guise of being pragmatic and practical.
But first things first: income tax, particularly the corporate variety, has to be on the table in order to create a more inclusive, equitable and progressive Bermuda. And we can do that only by replacing what amounts at present as an indirect, regressive tax system. That system being one which places it burdens disproportionately upon the poor and those of modest means in a very iniquitous way, as in the case of payroll tax, which is essentially a tax on labour. Most of those who have been most affected historically have been Black Bermudians simply because, with a tax regime such as this, it takes its biggest bite out of those at the bottom of income distribution and has done so principally via customs duties and our payroll tax system as mentioned.
How else are we to find the resources to pay down our debt and eliminate our ongoing deficits in order to provide the necessary services for our ageing population? Or to provide a proper unemployment scheme or ensure that thousands of people going without health insurance is a thing of the past? Pre-pandemic, more than 5,000 persons did not possess health insurance and just under 5,000 of those were Black Bermudians. How many are there now without health insurance with this pandemic and rising unemployment over the past year? All of this in one of the wealthiest countries in the world.
Note that the Fiscal Responsibility Panel’s 2018 report has stated that it is highly unlikely that Bermuda through economic growth alone, especially with a shrinking workforce, can pull itself out of this debt trap. That is why they characterised our tax base as too narrow. The question is not whether tax increases are necessary, but rather what kind of taxes are required.
How else can we ensure that the proposed living wage is sustainable or that the cost of living is substantively reduced for the working poor and Bermuda’s shrinking middle class? You tell me. It all starts first with a root-and-branch transformation of our tax system.
We will have no hope in reducing income and exploding wealth inequality in Bermuda without it. Tweaking it as we have been doing for decades will not achieve that objective. Freddie Wade, my hero, used to say you can put lipstick on a pig, but it will still, after all is said and done, be a pig.
On the other side of the coin, increasingly, as O’Hara counsels as well as others behind the scenes, major change on this front has to be on the table to staunch the reputational damage done to Bermuda as a global financial centre or hub. Bermuda is now viewed as a tax haven, plain and simple. That characterisation has been concretised globally and weaponised against us by multinational, transnational blocs such as at the European Union, the Organisation for Economic Co-operation and Development, and Western media. At least three out of five references found in most internationally sourced news stories or respected journals routinely refer to us as a tax haven — not as a premier tourist destination.
Perception is reality and that perception has grown tremendously over the past ten years despite our efforts to combat it. The latest mention was highlighted in a recent Guardian newspaper article on Facebook closing its Irish holding companies in December, citing Bermuda as a key indispensable tax haven when it comes to tax avoidance. At the end of the piece, it emphasised the link between Bermuda and Google in another tax-avoidance scheme and used the dreaded tax-haven term that has become our modern red letter. This accusation globally is no longer the exception, but is now in fact the rule.
Let’s face it, the global insurance/risk management industry is the straw that stirs the drink when it comes to International business in Bermuda and our economy. The late Financial Secretary Anthony Manders only about a year ago shared with me the amount of payroll tax alone as a percentage of the total that about 23 insurers contribute to the Government’s budget. I agree with O’Hara’s concern here because there is a growing consensus internationally that offshore centres such as ours, which have been facilitating massive amounts of tax avoidance via the hundreds if not thousands of global companies domiciled here, have to be reined in
We also know, as alluded to, that the OECD is due to come with its proposals soon for substantive change to the global financial ecosystem. These so-called tax havens have played a critical role in facilitating tax avoidance on a monumental scale. This has affected not only wealthy Western countries but also some of the poorest countries in the world where its impact is even more destructive. The latest effort revolves around adopting a global minimum corporate tax rate or, to use a term from the late 1990s first touted by the French and Germans, “tax harmonisation”.
Nothing last for ever and four decades after the monumental rightward shift of our political economies fostered by Ronald Reagan and Margaret Thatcher in the West, the world’s appetite for explosive levels of income and wealth inequality has diminished considerably. Look no farther than Brexit in Britain and Trumpism in the United States to see the type of impact it has had on our politics, along with other issues.
Locally, we can pull out our hair, wag our fingers and cry foul. We can talk and brag — believe it or not — about us having what is in effect a regressive and inequitable tax system that was put in place roughly 100 years ago. What is not said is that our tax system was originally designed to place our tax burden on the backs of the poor and those of very modest means, and by doing so it ensured that the wealthy paid relatively little at best.
But how do we make this happen in a way where it is a win-win for Bermuda, its government, local business and exempt corporations — especially, and most critically, those in international business that we have become too dependent upon in my view? And can we achieve that buy-in now when clearly mutual interests as highlighted are now aligning in such a way to make this conversation hopefully a less contentious one?
I believe we can. The timing is right and this goal is highly doable because both sides recognise that this present model is broken and both have an interest it in fixing it. On the one hand, you have a government mired in growing deficits and debt approaching $3 billion. The same government that has also forecast that Bermuda will witness a decline in revenues for 2020-21 of 18.5 per cent. All of this while the international business sector is having its reputation hammered globally.
I firmly believe that now, during this crisis driven by the pandemic that has further deteriorated the Government’s fiscal position, is the time to not only to have this conversation but to ensure that it becomes a reality in terms of major public policy changes — and soon.
I don’t believe we need a long, drawn-out, gradualist approach to this issue, either. There is literally too much at stake here. Why waste time on an issue that we should have implemented decades ago? The only thing lacking here, perhaps, is political will.
I was convinced that the optimal time to have done this would have been right after the 2017 General Election. The Government had a significant opportunity and a sizeable mandate, and could have used some of that political capital to quietly and, yes, secretly commence those discussions with the movers and shakers at the Association of Bermuda Insurers and Reinsurers and other stakeholders about the need to move in this direction. Perhaps somewhere offshore at sea, for example, or way offshore in a conference room in New York, London or Kathmandu in order to hammer out a deal.
The contours of the deal would be really quite simple, with Phase 1 being the biggest challenge — that being the adoption of a corporate income tax. Income tax at the individual level, which is also necessary, would then be addressed by way of a Phase 2 approach so as to militate the anticipated stress on the system
I am advocating that the same sort of deal should be struck as O’Hara advocated. This would see the international business community agree to accept a modest 5 per cent to 7 per cent corporate income tax — slightly higher than the 4 per cent that O’Hara touted. I do agree with him that this could be facilitated at the bureaucratic level by simply renaming or categorising payroll tax as (corporate) income tax along with other substantive changes. This would also eliminate the dreaded double taxation issue with the Americans, as payroll tax would be eliminated.
What of the so-called legal obligation or, more specifically, the Exempt Undertakings Act that essentially precludes us from unilaterally imposing any taxes on income or capital gains as it relates to that sector? It is due to expire in 2035; there would be simply a mutual agreement at my fantasy offshore meeting to rescind it.
Good public policy would also ensure that there are certain progressive measures written into the proposed tax code that would see small to middle-sized enterprises carrying far less of the tax burden proportionately than those of larger corporations or businesses.
Pre-pandemic, the Fiscal Responsibility Panel commissioned by the Government wrote the following in its report under the heading “Fiscal strategy and tax reform”, where it advocated for phasing in income tax or, as stated, a “labour” income tax in addition to a corporate income tax.
The report stated: “We continue to believe that over the long term it would be appropriate to raise tax revenues significantly as a share of GDP, in line with other similar economies…”
“We also think it necessary to increase revenues from multinational companies registered in Bermuda, whether by increasing registration fees or, over the medium to longer term, the introduction of a corporate income tax, which would also make a major contribution to improving Bermuda’s position in international negotiations on the tax harmonisation issue”.
The panel advocated that Bermuda needed to raise its taxable share of gross domestic product to about 23 per cent — a target we have yet to achieve.
The upside for international business and/or the finance sector would be that the above would effectively slay the tax-haven dragon that has been breathing down our neck for some time and contribute to the long-term stability of the sector. It would also move Bermuda firmly into the “20th century” when it comes to adopting a more progressive and equitable form of taxation. The irony is that only 15 years ago, what I am about to convey would have sounded like heresy and I would have been forcibly exiled for doing so, but the reality is that this fundamental change is likely to enhance our global competitiveness as opposed to hurting it.
The returns we receive for the presence of international business have been declining for some time. It is no longer commensurate with the benefits they derive from being here. Even in terms of job creation, as O’Hara pointed out, the new start-ups in this emerging hard market — some of whom will be commencing operations in months — will be hardly generating the types of employment that they did in the 1990s to mid-2000s. We are a leading centre of insurance-linked securities, and have been for more than a decade after it was midwifed by legislation introduced by the Progressive Labour Party government. But how many jobs has it produced?
We perhaps have a once-in-a-half-century chance in effecting the type of re-engineering of an economic model that is clearly broken. We can forge a real partnership, a new compact with international business and create a new model that is transformative and more equitable for all of our people. It just is going to take our acknowledgement that there is a mutual interest on the part of both parties in achieving that stated objective. Is the re-engineering of our tax system the only indispensable change needed? No. Immigration is another issue that we must face owing to the rapidly ageing nature of our population. But it is a fundamental and long-overdue one.
I might also add that our constitutional and political model is also broken. More than 10,000 who voted in 2017 chose not to vote at all in 2020. This represents the biggest collapse ever in the modern era of Bermuda politics, post-1968. This to me signals that the House That Jack Built, which we have been all living in for more than 50 years, has reached the end of its useful shelf life. The Irony is that Jack Tucker can be credited, more than most, with creating both models.
• Rolfe Commissiong was the Progressive Labour Party MP for Pembroke South East (Constituency 21) between December 2012 and August 2020, and the former chairman of the joint select committee considering the establishment of a living wage