The Cayman Islands Real Estate Brokers Association has joined Forbes Magazine in calling the proposed payroll tax on work permit holders “fiscal suicide”.
In its statement issued on Wednesday, the CIREBA board was critical of the thinking behind the tax proposal, which would require all work permit holders earning more than $20,000 to pay what Premier McKeeva Bush has termed a “community enhancement fee” of 10 per cent of their salary or wages.
“The foundation of the lunacy surrounding this approach lies in the fact that this attempt to tax and spend our way out of financial trouble has been tried repeatedly over the course of history and failed miserably each time,” the CIREBA board stated, adding that Cayman should learn from the history of other countries that made a similar mistake.
The CIREBA board listed a number of negative aspects of the tax proposal.
“From a marketing perspective we are giving up the single-most important value proposition that the Cayman Islands has to offer our investors – no direct taxation in a world where taxation is on the increase everywhere else,” the statement said. “In doing so we will have lost the primary advantage that distinguishes Cayman from the rest of the world and fallen directly into the hands of our competition.”
Like other entities that have come out in opposition to the proposed tax, the CIREBA board said that once a system is created to collect payroll taxes, investors will not trust the rate would remain at 10 per cent or stay confined to work permit holders.
“[Investors] will not trust or believe it will stop there,” the board stated. “Once a tax system is put in place, it invariably becomes the thin end of the wedge, and taxes never go down in places where such systems have been instituted. Any investor with a rudimentary understanding of history will see that this 10 per cent tax is just the start of bigger taxes to come. The spectre of higher taxes and therefore lower returns cannot possibly attract inward investment.”
The CIREBA board said that since Premier McKeeva Bush’s announcement that the government intended to impose the expat payroll tax, Cayman’s real estate industry was already seeing “numerous deals either put on hold or cancelled”.
“Apart from the certainty that this will reduce government income in the short term, it could very well lead to an outward exodus of tax sensitive investors to other jurisdictions, leading to reduced income in the long term as well,” the board stated.
Another possible negative effect of the proposed payroll tax involved the relations between Caymanians and expatriates, the CIREBA board noted.
“Starting with the most recent ill-advised stamp duty law, which for the first time created differing rates for Caymanians and for expats, we have begun to encourage divisiveness between two groups who have, hand-in-hand built, the Cayman Islands into what it is today,” the board stated. “This is a sad and totally unnecessary development. Foreigners and expats will eventually take affront to this and leave. And once this tax is in place, and those taxed decide to leave, [tax] will be applied to Caymanians, and at an ever increasing rate.”
CIREBA’s board noted that it was overspending by government that created the budget problem in the first place and that the solution wasn’t in imposing new taxes.
“The problem of bloated inefficient or unnecessary government is never going to be solved if we give the politicians a new and unlimited source of funds to continue to pay for it,” the board stated. “This will make the country further dependent upon government for jobs and eventually entitlements (handouts). In that way this is actually a prime re-election tool for any Government, which survives its implementation.”
The board noted that there would be several other consequence of implementing a payroll tax.
“If payroll tax is implemented, all Cayman companies will have to keep proper, and most likely, audited books. Otherwise, there would be no way for the government to really assess what employees are paid,” the board said. “This will cause the cost of business to go up considerably for those compliant with the law. But, as everyone knows from the compliance levels with respect to the Pensions and Insurance Laws, there will be large numbers of companies that ignore the law. This law is so expensive that it will likely cause even more employers to go rogue. Just like in other tax jurisdictions, you will see employees working “under the table” and an increase in illegal expat workers. There is no way Cayman’s justice system will be able to keep up with the workload.”
The CIREBA board said government must be run like a business.
“In times of prosperity it can expand, still ensuring it keeps a reserve fund for bad times,” it stated. “In bad times it must contract and reduce its size and expenditure to get back to a break even level. Those are basic economic concepts. Every Caymanian business, which has survived from 2008 – 2011, has had to do this.”
The proposed tax is seen as something that will cause major and lasting changes in Cayman by the CIREBA board.
“It is a paradigm shift in our country’s approach to funding its liabilities,” it said. “And if enacted, it will forever change the way we do business in Cayman. To pay for failed policies by destroying the very economic engine which provided the prosperity to which we all strive to return is an absurd response.”
Forbes Magazine, a leading US business publication, carried an article online on Tuesday that similarly equated the implementation of a payroll tax as “fiscal suicide”.
Contributor Daniel Mitchell said that a good fiscal policy would have the private sector growing faster than the government and that “bad things happen when governments violate this common-sense guideline”.
“In the case of the Cayman Islands, the “bad thing” is that the government is proposing to levy an income tax, which would be akin to committing fiscal suicide,” Mitchell wrote.
“So why are the local politicians considering a plan to kill the goose that lays the golden eggs?” he asked. “For the simple reason that they have been promiscuous in spending other people’s money.”
The article published a chart which showed that Cayman’s government spending had climbed twice as fast as economic output since 2000.
“Much of this spending has been to employ and over-compensate a bloated civil service,” he wrote, adding that Cayman was “sort of a Caribbean version of California”.
“In other words, the economic problem is that there has been too much spending, and the political problem is that politicians have been trying to buy votes by padding government payrolls.”
The grass-roots cyberspace protests to the propose tax continued on Facebook and online forums on Wednesday, even though one actual demonstration was cancelled.
The Caymanians and Expats United Against Taxation group called off a protest it had planned to hold at the meeting of McKeeva Bush Wednesday in West Bay, citing intimidation and threats,
However, founder of the group, which was set up on Facebook, Nick Pitman urged members to nonetheless attend the meeting about the controversial tax to listen to what Premier McKeeva Bush had to say and to ask questions.
The group has rescheduled its protest action to Monday evening in George Town.
On the group’s Facebook page, Mr. Pitman said early on Wednesday afternoon: “Although we made a decision to postpone the protest itself because of the intimidation members were facing and the concerns raised by some of our members, we are still keen to see as many people in our group as possible attend this critically important meeting this evening [Wednesday], where hopefully we can be more accurately informed about the precise nature of this discriminatory tax the premier intends to impose.”
Earlier, Mr. Pitman, said the protest was being postponed because there had been a “disturbing number of personal attacks on myself and others” in the group and that civil servants who wanted to attend the protest had been threatened.
In his posting, Mr. Pitman told supporters: “Your attendance [on Monday] is more important than ever as you are leading the progression of Cayman politics and taking power from the old guard and back to the people.”
He added: “Bring your friends, placards, banners, and a nice non-aggressive attitude. No shouting – smiles and refreshments are welcome. Let us show our united front, we are not swayed by threats or slander. Let’s show how much we love Cayman, and how we feel after rollover, this is killing this beautiful place we call home, hurting the very people Mr. Bush claims to protect.”
Another group, the Truly4Cayman Coalition said they also planned to attend the meeting in West Bay and urged the members of the Caymanians and Expats United Against Taxation to join them.
That group, which consists of members from the Concerned Citizens Group, West Bay Action Committee, Keep Bodden Town Dump Free and the Save Cayman Group, in an emailed announcement to media outlets Wednesday morning said they would be at the Sir John A. Cumber school hall to “welcome the Honourable Premier to his meeting about his proposed ‘Community Enhancement Fee’.”
The group said it was confident that the Royal Cayman Islands Police Service would protect members’ right to assemble.
The notice from the group read: “Mr. Premier, you may be able to scare some of the people, some of the time, but not all of the people all of the time.”
It called on the members of the Caymanians and Expats United Against Taxation “not be intimidated, stand your ground” and join the Truly4Cayman Coalition Group at the West Bay meeting.
The Caymanians and Expats United Against Taxation’s demonstration will be held outside the courthouse and the Legislative Assembly at 5.15pm, Monday.
Leader of the Opposition, Alden McLaughlin, said he and independent North Side MLA Ezzard Miller planned to hold a meeting in George Town addressing the proposed imposition of a 10 per cent tax on expatriates earning more than $20,000 a year following the protest action on Monday night. More details on that meeting would be available later, he said.