How to raise revenue – what the Miller Shaw report said

The Miller Shaw Commission was appointed to assess how government finances could be stabilised and analysed in its report existing and potential new measures, as well as opportunities for cost cutting.  

Although the study found that Cayman’s fiscal problems were a result of excessive spending, rather than insufficient revenues, it investigated various revenue measures as to their economic effect. On the whole, Miller and Shaw concluded that additional levies would be counterproductive and recommended spending cuts and divestments of government assets.  

 

Direct taxes  

Miller and Shaw rejected the idea of introducing a personal income tax or payroll taxes, referring to the high mobility of the tax base of foreign workers. Moreover, they noted the existing work permit system has already many of the attributes of a payroll tax and is more efficient in terms of administration, compliance and collection.  

Corporate income taxes would equally expose Cayman’s economy to significant risks, especially with regard to the extremely mobile financial services sector.  

“The Cayman Islands have enjoyed substantial prosperity, in part because it is a reasonably tax-neutral platform. Adopting any form of income or payroll tax would remove much of the fiscal allure that has boosted the economy,” the report said. “Moreover, any form of income or payroll taxation would require the imposition of an entirely new tax system, with both high set-up costs and potentially significant and permanent compliance costs. It also is unlikely that a tax on income, regardless of form, would solve the problem of variations in revenue collections.”  

 

Taxes on property   

An annual property tax, sometimes known as a community service charge, can be ideal if the government charges an amount commensurate with the cost of providing a service. However, in practice, the property tax rarely resembles that ideal, Miller and Shaw said. 

One key issue would be the amount of money that might be raised from such a tax, particularly if smaller properties are exempt.  

In turn, a tax on property transfers, such as the existing property tax, is not very efficient. To generate significant revenue the rate would have to be set at a nontrivial level, the authors noted. “At the very least, it will lower the selling price of homes. It also raises horizontal equity concerns, because the tax is borne solely by buyers/sellers of property rather than all property owners.” 

Other issues include the assessment process, the appeal process, the foreclosure process, and whether to have different tax rates and/or rules for Caymanians and non-Caymanians.  

 

Indirect taxes   

Miller and Shaw pointed out that governments like value added taxes because they are capable of generating substantial revenue and are somewhat self-enforcing, while economists regard VAT “as a relatively nondestructive way of raising revenue”. 

However, the introduction of a value added tax or sales tax, collected at the point of sale would require a greatly expanded civil service and probably would not collect enough revenue.  

If the Cayman Islands wanted to raise more revenue from import, via import duties, the most sensible option would be to impose higher taxes on goods with significant externalities and/or goods that have inelastic demand, meaning that consumers are not necessarily purchasing less when prices are rising. “Obvious choices include tobacco, which satisfies both criteria (externalities because of government-financed healthcare), and higher-value motor vehicles, because of their excessive fuel consumption. Alcohol theoretically could be in this category, but policy makers would need to be careful about the impact on tourism, which is sensitive to the factors that affect the total cost of vacations.”  

 

Tourism taxes   

Tax revenues directly related to tourism account for only about 5 per cent of total revenue, but if indirect effects are included, the number is significantly higher. 

The report advised against tourism taxes, due to the susceptibility of tourism to a depressed economy, the strong competition in the industry between different destinations and because for some sections of the market taxes on tourism are already high.  

It is also not clear how much additional revenue could be raised through higher taxes on tourism, Miller and Shaw said. 

“Higher levies on tourists would be unlikely to result in an increased expenditure per day, and so any further increase in revenues from tourists would have a direct, negative effect on the tourism industry. There likely would be significantly fewer tourists, which would reduce revenues, whereas the sector’s problems are that volumes need to increase.”  

 

Financial centre taxes   

The financial services industry is the major driving force behind the economy of the Caymans Islands, generating more than half of economic output and almost 40 per cent of direct government revenue. The Miller Shaw report found that substantial fees are already imposed on the financial services industry in the form of higher annual company fees, registry fees, bank license fees, mutual fund annual fees and work permit fees. At the same time these fees are higher than those imposed by competing jurisdictions.  

In this context work permit fee increases should be accompanied by a liberalisation of the work permit regime allowing longer stays or a greater chance of permanent residency, the report stated.  

 

Other taxes   

The report also investigated other new forms of taxation on energy or gambling as well as poll tax.  

An additional energy tax would cause inflation and entail significant political and economic risks and have a negative on the local population. In turn a poll tax or residency fee, in the form of a head tax would have to be high enough to outweigh the significant costs of implementation, but the UK’s historic experience “with twice having tried to impose a poll tax on its own people renders the suggestion inappropriate to contemplate in a British Overseas Territory”, Miller and Shaw argued.  

With regard to the legalisation of gambling, Miller and Shaw were struck with the opposition to such an idea on moral grounds, but also said there is no conclusive evidence whether gambling creates more benefits than costs. 

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1 COMMENT

  1. Miller and Shaw are right: Any new tax or rise of fees would be counterproductive for the economy. The good news is that the Government does not need more revenue. Just take a look at how much money is wasted. Mostly for a bloated civil service whose members enjoy free medical care not only for themselves, but also for their families, as well as lifelong pensions even if they keep working beyond 65. Millions and millions are wasted on Cayman Airways, the Turtle Far, CINICO, NBF…
    The Government should sell off any assets that are not part of its core competences and use the proceeds to repay outstanding debt, thus reducing debt service. The Shetty Medical Centre (now well on its way), a new waste incinerator, extension of the Owen Roberts airport’s runway, cruise ship berthing facilities and the introduction of gaming casinos would boost the economy. For the benefit of all Caymanians.

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