Goods and Services Tax - Zero-Rating for Foodstuffs, Books, Newspapers and Magazines

STATES OF JERSEY

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GOODS AND SERVICES TAX: ZERO-RATING FOR FOODSTUFFS, BOOKS, NEWSPAPERS AND MAGAZINES.

Lodged au Greffe on 26th October 2007 by Senator B.E. Shenton

STATES GREFFE

PROPOSITION

THE STATES are asked to decide whether they are of opinion

(a ) to refer to their Act dated 13th May 2005 in which they approved the introduction in 2008 of a

broad-based Goods and Services Tax (GST) at a rate of 3% fixed for 3 years, and to their Act dated 18th April 2007 in which they approved the draft Goods and Services Tax (Jersey) Law 200-, and to agree to vary those decisions as appropriate in order to zero-rate the following items –

( i) f o o d stuffs in line with United Kingdom Value Added Tax arrangements as set out in

Appendix 1; and

( ii ) b o o ks, newspapers, and magazines in line with United Kingdom Value Added Tax

arrangements as set out in Appendix 2.

(b ) to request the Minister for Treasury and Resources to bring forward for approval the necessary

Regulations so that the zero-rating of these items is in place when GST is introduced in Jersey.

SENATOR B.E. SHENTON

REPORT

Jersey Evening Post Headline – Tuesday 23rd October 2007

"Money, Money, Money! Boom time for Jersey as Budget deficit turns into a whacking £38,000,000 surplus"

" We've got money coming out of our ears'. Those infamous words of Jersey's chancellor in the 1980s could be repeated today as a predicted budget deficit of £3 million turns into a surplus of £38 million."

A difference of £41,000,000 – and it could happen again next year! _____________________________________________________________________

I'm a stockbroker/investment manager by trade, not a profession that is often associated with over-powering social values. I'm also a capitalist, one that realises that we can achieve more if we all work together to improve the quality of life. Adam Smith, the father of economics, believed completely in the importance of society and the need to consider the needs of others. And that's largely the difference between an economist and an accountant – the accountant's job is to balance the books, the economists job is to improve the wellbeing of all the people and manage the economy.

I believe the concept of taxing basic foodstuffs is morally wrong and has no place in a wealthy society. It is also dangerous from a long term prospective. A strong economy with lower tax will ultimately yield more taxation revenue than a weak economy that taxes everything. The Treasury seem to believe that GST tax receipts will be the same regardless of the strength of the economy.

Listening to some of my colleagues I am often reminded of a Monty Python sketch in which a rather stupid and confused Robin Hood stole from the poor and to give to the rich. This is exactly what we are doing. Income support will compensate the very low income earners – but what about the rest?.

Value Added Tax, or GST, was introduced in France in 1954, to replace a system which relied on a highly distortionary turnover tax on sales to supplement a rather ineffectual income tax system. VAT was subsequently adopted by other European countries, and the use of a VAT was made a condition of membership of the European Union. Not surprisingly, the United States ignored the VAT, and has suffered no obvious ill-effects, a fact ignored by prophets of the doom from which only tax reform can save us. Still the advantages of the VAT were sufficient to convert the United Kingdom in the 1970s and Canada and New Zealand in the 1980s. Why then, has Jersey proved so resistant to what seems to be an eminently sensible reform?

The answer is that the Jersey advocates of a GST originally tied this change to a change in the tax mix that will give more weight to indirect taxation and for the deletion of exemptions, notably for food, education, and medicine.

The claim that a worthwhile GST must have few or no exemptions is untrue, as is shown by the practice in most European countries, where food is exempted or taxed at a low rate. In fact, the GST mechanism is better able to cope with exemptions for necessities than are wholesale and retail taxes, because of the possibility of zero-rating. Applied to food, for example, zero rating would imply that the food, but not the service, component of a restaurant meal would be tax-free.

The introduction of a tax on food would be highly regressive, particularly in view of the certainty that financial services, overseas holidays and other luxuries will be exempted. According to the ABS Household Expenditure Survey (I have used an Australian Survey as being more independent), expenditure on food, excluding restaurant meals, is equal to about 35 per cent of pre-tax income for the poorest 20 per cent of households and to only 7 per cent of income for the richest. That is, a 10 per cent tax on food amounts to a 3.5 per cent tax on income for members of the lowest income households and a 0.7 per cent tax for high income households. The move to a GST/VAT is a worthwhile reform, but not if it is bundled with a new tax on food.

Expenditure per person on food, excluding restaurant meals, scarcely varies with household income. It is, in effect, a poll tax

The argument for exempting food does not extend to other commodities, such as clothing, housing and fuel, sometimes classed with food as necessities of life'. In a study of the effects on inequality of consumption taxes levied at differential rates, Creedy (1993, p.93) it has been found that the exemption of food has the largest effect on the inequality of net income; the subsequent introduction of further exemptions or of a higher rate applied to some commodity groups has little effect'.

Senator Le Sueur mentioned that he wants to keep GST at the lowest rate in the world (N.B. The lowest rate in the world is 0%!!) which is why he does not want exemption. However we do now have exemptions on other areas which were previously argued to be unacceptable, such as education, child care, and medical supplies. The argument that we have to have a tax with no exemptions has already been lost.

Often the Ministers have mentioned New Zealand as a tax model that should be followed.

The New Zealand tax reform package of 1987, under which food was taxed at the full GST rate, included some compensation measures for  recipients of welfare benefits,  but it does  not appear  that these measures were sufficient to offset the regressive impact of the package as a whole. The issue is academic since the compensation measures were more than wiped out by across-the-board cuts in welfare benefits introduced in 1991. Since the New Zealand reforms were also associated with slow economic growth and increasing inequality in market incomes, there can be no doubt that low-income households were made worse off.

Low-income households can be assured that they will bear the brunt of any tax on food and it is much harder to ensure that compensation will be adequate or that it will be maintained in the long term.

Consider first, the possibility of providing a fixed payment to every member of the community, which would be sufficient to compensate households in the bottom quintile of the income distribution for the costs of a food tax. We have already seen that households in the bottom quintile spend almost as much, per person, on food, as those in the top quintile. That is, a compensation scheme of this kind would wipe out nearly all of the revenue raised by the food tax. To guarantee that all low-income earners were better off, it would be necessary to provide a safety margin. This would probably mean that the cost of compensation would exceed the revenue raised by the tax.

I believe that there are 3 core principles in life –

Hard Work Education Family

Yet we originally wanted to tax education?

We want to tax people for getting ill? (albeit medical services are now exempted) We want to tax the food that they eat.

How many of us have stood in a supermarket queue whilst the person in front counts their pennies to see if they can afford the meagre items in their basket.

Jersey has a high cost, high inflation economy that risks becoming uncompetitive on a World stage. We have to get better value for money from our tax spend and we have to get more for less.

Senator Le Sueur commented yesterday that Jersey was a low tax economy and he wanted it to stay that way.

Unfortunately his remark may have been true 10 years ago when duty was low and allowances were high. Today it is cheaper for your average worker earning around £28,000 to live in the U.K. than it is in Jersey when property costs are taken into account.

When anything new is introduced you can start with a clean sheet of paper. It is a tremendous opportunity to put in place the right structure that will stand the test of time – and over time the rate may go up as income from other areas diminishes. Is it right to tax milk at 10%, to tax food at 10%, to tax books at 10% – I think not.

The cost of exemptions, as pointed out by the scrutiny panel, is not nearly as high as the Treasury Minister originally led us to believe. This cost of administration was one of the cornerstones of the original argument for one low rate – this argument is now not so strong.

Connétable Gray, as Chairman of Privileges and Procedures, has spoken on Radio Jersey about pensions for States Members and severance pay for members that lose their place. No wonder that to the outsider we only seem interested in ourselves.

Too often the message of this Assembly to the people of Jersey seems to be I'm alright jack.' I say let's do what is morally right, lets start delivering, lets start listening to the people. Let's not start charging OAP's tax on a loaf of bread, the sick for their chicken soup, the ambitious for their text books.

I was at a speech about 10 years ago and Colin Powell was the speaker. Someone asked him whether the quality of life has declined in Jersey since he arrived in the early 1960s. His reply was yes it had – but not as much as everywhere else.

We now seem to be hell-bent on declining as fast as everyone else. GST may not stay at 3%, Income Support may not sufficiently compensate those on very low incomes, those just above the threshold will be significantly worse off, internet abuse on luxury goods will be rife – increasing the necessity of the tax.

Please support the amendment – let's get it right. Let's stop listening to the consultants in their ivory towers with their finance industry exemptions safely negotiated – let's start listening to the people. We don't need to tax food and books, it is morally wrong to tax food and books, the public don't want us to tax food and books. GST should be 3% with exemptions – nothing else is acceptable.

Financial and manpower statement

There will certainly be a cost in zero-rating the items suggested in this proposition. There will also be some additional administrative cost involved in the zero-rating process, though I am deeply sceptical of the cost of this latter factor cited by the Treasury and their consultants. Jersey already has purchase taxes upon some goods and not others, for example duty on motor fuel, alcohol and tobacco products. This approach to taxing some goods and not others appears to have worked perfectly acceptably for many decades without the need for a massive and expensive bureaucracy.

In respect of the GST revenue which would be lost in the event of zero-ratings, any number of options exists for recovering this amount. However the Treasury's track record on revenue forecasting is so woefully inaccurate that I believe that the rate can be left at 3% with the proposed exemptions and major budgetary problems will not arise. Remember a forecast deficit of £3 million has, in fact, turned into a £38 million surplus! Do not rely too much on figures produced by a Department with such a poor forecasting record. What happens if we produce £41,000,000 more than expected again next year?

What is a plain and immutable fact is that the States could zero-rate items if they chose to. If the States Assembly refuses to zero-rate these items it will be because it wants to – not because it has to.

In Appendix 4 I have reproduced Senator Syvret's proposition on GST exemptions from 2006 for members' information.

UK VAT Exemptions

Group 1 – Food

The supply of anything comprised in the general items set out below, except –

1. a s upply in the course of catering; and
2. a s upplyof anything comprised in anyof the excepteditemsset out below, unless itisalsocomprised in any of the items overriding theexceptionssetoutbelowwhich relates to that excepteditem.

General items

Item No.

1. F o o d of a kind used for human consumption.
2. A  n imal feeding stuffs.
3. S e e dsor other means of propagation of plants comprisedinitem 1 or2.
4. L i v e animalsof a kind generally used as,or yielding orproducing, food for humanconsumption. Excepted items

Item No.

1. I c e cream, ice lollies, frozen yogurt, waterices and similar frozenproducts, and preparedmixes and powders for making such products.
2. C o n fectionery, not including cakes orbiscuitsother than biscuits wholly or partly covered with chocolate or someproduct similar in taste and appearance.
3. B e v erages chargeable with anydutyof excise specifically charged on spirits, beer,wineormade-wineand preparations thereof.
4. O  th er beverages (including fruit juices and bottled waters) and syrups, concentrates, essences, powders, crystals orother products for the preparationofbeverages.
5. A  n y of the followingwhenpackagedforhumanconsumptionwithout further preparation, namely, potato crisps, potato sticks, potato puffs, and similar products made from the potato, or from potato flour, or from potato starch, and savoury food products obtainedby the swellingof cereals orcerealproducts;and salted or roasted nuts other than nuts in shell.
6. P e t foods, canned, packagedorprepared;packagedfoods (not beingpetfoods)forbirdsother than poultry or game; and biscuits andmealforcats and dogs.
7. G  o ods described in items1, 2 and 3 of the general itemswhich are canned, bottled, packagedorprepared for use –

(a ) in the domestic brewing of any beer;

(b ) in the domestic making of any cider or perry;

(c ) in the domestic production of any wine or made-wine.

Items overriding the exceptions

Item No.

1. Y  o ghurt unsuitable for immediateconsumptionwhenfrozen.
2. D  ra ined cherries.
3. C a n died peels.
4. T e a , maté, herbal teasand similar products,and preparations and extracts thereof.
5. C o c oa, coffee and chicory and other roasted coffee substitutes, and preparations andextractsthereof.
6. M  il k and preparations andextractsthereof.
7. P r e parations and extracts ofmeat,yeastor egg.

Notes:

1. "F ood" includes drink.
2. "A nimal" includes bird,fish, crustacean and mollusc.
3. A supply of anything inthecourse of catering includes –

(a ) an y supply of it for consumption on the premises on which it is supplied; and (b ) an y supply of hot food for consumption off those premises;

an d f or the purposes of paragraph (b) above "hot food" means food which, or any part of which –

(i ) h a s been heated for the purposes of enabling it to be consumed at a temperature above the ambient

air temperature; and

(i i) is a t the time of the supply above that temperature.

4. It e m 1 oftheitems overriding the exceptions relates to item 1 of the excepteditems.
5. It e ms 2 and 3 of the items overriding the exceptions relate to item 2 of the excepteditems; and for the purposes of item 2 of the excepted items"confectionery" includes chocolates, sweets and biscuits; drained, glacéor crystallised fruits; and any itemofsweetened prepared foodwhich is normally eaten with thefingers.
6. It e ms 4 to 6 of the items overriding theexceptions relate to item 4 of the excepteditems.
7. A n y supplydescribedin this Groupshall include a supply of services described in paragraph 1(1) of Schedule 4.

Amendments to Group 1:

The Finance Act 1999 section 14 stated that Group 1, in respect of preparations of meat, yeast or egg, shall be deemed to have and to always have had effect as if for Items "4 to 6" in Note (6) there were substituted "Items 4 to 7" (effective from 27 July 1999).

UK VAT Exemptions Books etc

Item No.

1. B o o ks, booklets, brochures,pamphletsand leaflets.
2. N  ew  spapers,journals and periodicals.
3. C h i ldren's picture books and painting books.
4. M  u sic (printed, duplicated ormanuscript).
5. M  a ps, charts and topographicalplans.
6. C o v ers,casesandother articles supplied with items 1 to 5 and not separately accounted for.

Note:

Items 1 to 6 –

1. d o not include plansordrawings for industrial, architectural, engineering,commercialor similar purposes; but
2. in c ludethesupplyoftheservices described in paragraph 1(1) of Schedule 4 in respect ofgoodscomprised in the items.

Article Written for Business Brief by Ben Shenton

When we debated GST exemptions in 2006 I wondered whether I was "out-of-step" with my colleagues within the business community. I was, after all, supporting UK VAT type exemptions on food, books, newspapers, etc. whilst the loud chorus from the trade bodies and organisations such as the Chamber of Commerce was very much – keep it low and have no exemptions'. They appeared to have taken at face-value the assertions of the Treasury Minister that the cost of administering exemptions is high – assertions disproved not only by the relevant scrutiny panel but also by the subsequent u-turn on exemptions for charities and medical goods.

As a Director of The Channel Islands Co-operative Society I am well aware of the logistical and administrative costs that GST on food will create. Nearly all of our goods are imported from the UK where sales tax is not applied to most foodstuffs. Despite high transport costs a pre-weighed pack of cheese is currently sold at UK prices, and a 99p special offer (with 99p splashed across it in large letters) is sold at 99p. The UK VAT system is complicated but the work has already been done and relevant software is readily available to local businesses. Under the chosen system the 99p special offer will cost the consumer 102p – making the Island seem very expensive.

Yet why did the Chamber of Commerce, Jersey Hospitality Association, IOD, and others not stand up for their members by looking more deeply into the ramifications of a flat rate? Do we really have a tourist industry that does not believe that paying more than anywhere else in the British Isles for a newspaper will not label Jersey as an expensive place to visit? It is the little things that stick in the mind . As politicians we are constantly reminded of the steam clock, and the assertion that food prices in Jersey are very high is largely based on the price of two locally produced necessities – bread and milk. Yet the government solution of a third supermarket will bring down the price of neither. The high cost of these is a result of a desire to remain self-sufficient and keep brown cows in green fields'. Who would really want to sacrifice the dairy industry for 10p off a pint? Do we want to become dependent on imported bread?

Because we did not think things through we have also got ourselves into a price-marking' fix. It is well known that many general retailers charge UK prices and fail to alter UK price labels. It is highly likely that with the introduction of GST they will continue this practise as it will be too costly to change prices and systems. Therefore from a local inflation viewpoint the introduction of GST in these instances will be largely neutral. Also with exemptions on-the-shelf pricing is much more practicable and acceptable solution.

If we went down the exemptions route the rate would be higher (4%?) but the impact on the consumer and the economy much lower. Add to that the social benefits of these exemptions on the less well off members of the community, and the savings on income support funding, you have a compelling argument that both the government and commerce have got it wrong.

I ask the Chamber of Commerce, IOD, and JHA to re-assess their conviction that GST without exemptions is indeed the right way forward. Hindsight may prove that I was not out-of-step and that in reality I was the only one in-step.

P.86/2006

STATES OF JERSEY

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GOODS AND SERVICES TAX: EXEMPT OR ZERO-RATED ITEMS

Lodged au Greffe on 4th July 2006 by Senator S. Syvret

STATES GREFFE

THE STATES are asked to decide whether they are of opinion

to r e fer to their Act dated 13th May 2005 in which they approved the introduction in 2008 of a broad-

based Goods and Services Tax (GST) at a rate of 3% fixed for 3  years, and to agree to vary that decision in order to exempt or zero-rate the following items –

(a ) b as ic foodstuffs;

(b ) m e dical services and products; (c ) ed u cation fees;

(d ) ch i ld care costs;

(e ) li fe insurance policies;

(f ) b o oks and newspapers;

(g ) ch i ldren's clothing.

SENATOR S. SYVRET

REPORT

Much has been written about the Goods and Services Tax (GST) and attempts to exclude certain items from the scope of the tax. I have produced 2 previous reports and propositions on the subject and the then Finance and Economics Committee produced 2 sets of comments on each of those proposals. Having re-read the comments of the then Finance and Economics Committee one is struck by 2 notable features of that Committee's arguments.

The first is the attempt to deny that GST is inescapably regressive. The Committee grudgingly had to state that the GST might be slightly regressive, but went on to cite ideologically extremist claims that sales taxes were not regressive at all. I will return to the issue of regressiveness later.

The second notable feature of the arguments put forward against zero-rating or exclusions within GST was the implicit notion that there was simply a single correct way to raise additional taxes and, more particularly, to structure this type of sales tax. Consequently, the Committee simply asserted that every alternative tax raising suggestion was, ipso facto, wrong.

If we are to have an honest debate about these questions we must recognise that any number of approaches to taxation would work. The States Assembly could agree with the GST as presently proposed. The resultant system would work. Alternatively, the States Assembly could agree with zero-rating items as I propose. The resultant system would also work.

In truth, the preference for one approach or the other is largely ideological. Politically I prefer a more progressive approach to taxation in which any increased tax burden is more proportionally directed at those in society who could afford to pay more. The previous Finance and Economics Committee had the opposite ideological view, instead believing that companies, the rich and the finance sector should be spared – as far as possible – any increased tax burden, so as to "not damage enterprise". There has also been a very clear view in certain political circles – though rarely, if ever, spoken publicly – that the tax burden should be more directed at the great majority of ordinary people and the less well-off, in order to teach them a lesson and punish them for expecting high standards of state provision in such areas as education and health care. It is not uncommon to see politicians in other jurisdictions using such mechanisms to seek to recruit ordinary people to the cause of cutting the quality and quantity of state sector provision thus reducing the need for taxation. Such an approach reached a nadir with the

ill-fated U.K. Poll Tax', a tax mechanism that shared a key characteristic of GST in that the tax bore no relation whatsoever to a person's ability to pay it.

The impacts of GST:

This is not to suggest that only working-class people need protection from the full effect of GST. Many people who might be classified as middle-class because of their household income, will be hit by GST on unavoidable expenditure in addition to such measures as 20% means 20% (although this has been modified somewhat to reduce its impact) and the removal of allowances. To take an example, many families shoulder the cost of sending their children to private education establishments. Many such families can barely meet this cost. It is not uncommon for a couple to do 2 or 3 jobs between them to raise the money needed to pay school fees, but they do so in an attempt to give their children a good start in life. As presently proposed, the GST will be levied upon education fees – this additional burden at a time when massively increased costs for tertiary education are likely to arise in the next few years. Should we really be taxing education?

Child care costs are another area we really need to question. The Island economy depends upon a high mobilisation of its workforce. Far greater numbers of women, as a proportion of population, work in Jersey than in virtually any other jurisdiction. Yet we will all be familiar with the fact that child care costs incurred when parents work can easily wipe out the advantage of additional earnings. What is already a marginal decision for many parents will become even less attractive with the cost of GST placed on child care costs.

Many families have to face the consequences of caring for elderly or infirm relatives. The cost of such care can be very high. Residential care home rates can be significant. Although some charitable sector residential care homes may charge around £345.00 per week, these costs are rare and are levied upon clients who remain fairly independent with low levels of needs. The usual average range for care home costs is between £550.00 to £1,000.00 per week. Nursing home care, which of its nature has to be more intensive for high-need clients, can cost in a range of £1,000.00 to £1,200.00 per week. In some cases the cost of such care is met by the state. In others, the individual concerned will have to pay the cost themselves with savings or the realisation of equity in property. Or their families will pay the costs. It is quite bad enough putting a 3% tax on these services. How bad will it get when the States inevitably raises the GST rate?

Should we tax a person's disposable income – or all of their income?

As presently posited, the GST proposal raises no tax upon the sometimes large sums that wealthy families are able to save. If income exceeds your expenditure, you will save the surplus. As it is not being spent you will pay no GST on it. By way of contrast, lower income families who spend all of their income – because they have no choice – will pay GST upon their entire post-tax income, with the sole exception of rent, because they have to spend it all. This is regressive taxation and, it has to be said, a concept the Treasury appears to have great difficulty coming to grips with.

The former Finance and Economics Committee stated that GST is to be viewed as a proportional tax upon consumption'. As such, they claim that it is, at worst, only "slightly regressive". They are simply wrong in this claim.

1 : R e g ressiveness is measured in relation to the proportion of income taken in tax, not consumption.

2 : C o n sumption as a proportion of income always falls (when measured across populations as a

whole) as income rises, because people with higher incomes save, when those on lower incomes tend not to save, or even spend in excess of their earnings.

3 : I t f ollows that consumption taxes are regressive. If you are spending all, or in excess of your

income, as many of the poor have to do, you pay a significantly greater proportion of tax upon your income. GST must, by definition, be regressive.

Given the fact that poorer people will often have to spend all of their income – or indeed, in excess of their income, thus going into debt – the GST will be highly regressive upon this cohort. By contrast as income increases, the amount taken in GST as a proportion of income will decrease given the significant opportunities for saving enjoyed by those on higher incomes. Thus GST meets the classic test of regressiveness. The attempts by the Treasury to deny or play down this fact simply cannot be taken seriously. If States members are minded to support the approach favoured by the Treasury, they must openly acknowledge they are favouring a regressive tax structure that will be disproportionately burdensome upon the poor and less well off. To fail to make this acknowledgment would be simply dishonest.

Low income support to the rescue?

The GST as proposed will be an unavoidable tax upon essential purchases. The less well-off in our society will have no choice other than to pay this new tax – a tax not based upon the ability to pay – but yet levied upon food, medicines and education costs.

It is at this point in the argument that opponents of zero-rating items in GST wheel out that ubiquitous panacea for all social hardships – the Low Income Support scheme. This scheme, it is claimed, will protect the poor. Perhaps. It just might protect the very poorest. But let us at least be honest. Many people to whom the GST will be a burden will not be remotely close to qualifying for Low Income Support. The very reason GST is being introduced is for it to raise a very significant amount of tax. If this were not the case, we wouldn't be doing it. Therefore, even if we accept, for argument's sake, that the very poorest will be protected by Low Income Support, the new tax will be a new and additional burden upon the great majority of people in our society. Proportionately, its impact will be smaller upon the wealthy, as they save a far larger proportion of their income, yet the impact upon the great majority of ordinary working people in our society will be larger. Whilst we might successfully protect the very poorest, we must also recognise that people, who will not be even close to qualifying for benefits, often struggle financially in Jersey. It is not uncommon for couples to do 3 or 4 jobs between them in order to make ends meet. Even if we protect the poorest, let us not pretend that this tax will not add to the burden of the less well-off. It certainly will.

GST and the labour market:

The hope has been expressed in political circles that the new cost burden of GST will not lead to corresponding wage and salary inflation. The words naivety' or wishful thinking' scarcely do justice to such a failure to grasp political realities. Employees will, of course, seek increases in their pay in order to compensate them for the additional tax. It may be asserted that employers need to stand firm' and not acquiesce to such workforce expectations – but is it not somewhat dangerous to base the success of a new taxation policy solely upon employers ability to withstand a new level of industrial dissatisfaction and unrest? We must be clear about this; for GST to achieve its objective it must not drive wage inflation. If it does, its gains are severely depleted. Demands for higher levels of pay will be far more difficult to resist if GST applies to food, medicines, health care and education. Expecting no wage inflation may be a forlorn hope in any event, but such inflation could only be minimised if we chose to exempt essential items from GST.

The minimum wage and failure in the labour market:

The cost of living in Jersey is extremely high, yet many businesses in Jersey depend upon comparatively cheap labour. Consequently, low wage employees will often not earn enough to cover the real market cost of living in Jersey. Taxpayers will often make up this shortfall in necessary income through a variety of mechanisms. Thus the commodity' of cheap labour in Jersey is subject to an artificial market intervention by the state. Taxpayers' money is used to subsidise those businesses that cannot – or will not – pay their staff the real market cost of living in Jersey. There are 3 very significant examples of this phenomenon. Private sector rent rebate, public sector rent abatement and – most significantly – social security supplementation; this latter in the region of £50 million per annum. Certainly, to a limited extent, the ubiquitous Low Income Support will step into the housing costs arena. Some accommodation cost relief will still be available to the poorest, but the likelihood is an increase in rental costs for much of the renting market as a result of benefits reform. Either way, the present market structure remains problematic. Subsidising rent is a continuing burden upon central taxation – and very probably inflationary. Yet some social groups who will be on low incomes will have subsidy removed during benefits reform. Whilst rent is to be exempt from GST, we are nevertheless facing increases in cost of living when GST is enacted. This fact, coupled with a possible loss of housing subsidy for certain groups of employees, will add to

salary and wage demands.

It could be strongly argued already – without considering GST – that the market failure in the labour sector should be addressed with appropriate policies. The most obvious solution is to require employers to actually pay their employees the real market cost of their labour through the mechanism of the minimum wage – paid at a rate that reflected the true cost incurred by that labour in living in Jersey. If this market policy was employed, the current spend of tax payers money on subsidising labour could be dramatically reduced, probably to the tune of many millions of pounds a year.

The relevance of benefits versus minimum wage to the GST debate is this: if GST is applied across the board – on essentials such as food and medicines – market factors swing more and more towards a substantially higher minimum wage – one that reflects market reality – and away from Low Income Support which – unless its cost is to be vast – will be narrowly targeted at the very poorest. To stand any chance whatsoever of minimising the impact of GST on the labour market, essential purchases must be zero-rated or exempt.

3% – but for how long?

In defending the GST much store has been placed upon the promise that the rate will remain at 3% for 3 years. This may well be the case. But then what? Once the initial resistance to the introduction of a sales tax has been overcome and the population has had a few years to get used to it, the rate will certainly be raised. This fact is strenuously denied by proponents of the GST who claim the rate will remain low indefinitely. But you would have to think the public very stupid if you expected this claim to be taken seriously. Even comparative information produced by the former Finance and Economics Committee – in which they sought to demonstrate that non-exemption was the most common approach to sales taxes in 25 European jurisdictions – showed basic rates of sales tax ranging from 15% (the lowest!) to 25%. If, as the Treasury would have it, the Jersey GST follows a similar model to the European norm – with a minimal approach to exemptions or zero-rating – what chance of the rate remaining at 3% here? Virtually nil. The fact is that sales taxes are one of the very easiest taxes for governments to raise the rate of. Once the public are used to the idea, it is extremely easy to add a couple of percentage points to the rate each year. We must look at the medium and long term when considering the impact of GST. The reality is that once the 3 years have expired, the States will begin to raise the rate. Where will it end up in 10 years' time? 5%, 8%, 10%, 12%? In case anyone regards these figures as unduly alarmist remember this – the dominant European model preferred by the Treasury has – as a minimum – a basic rate of 15%.

By carrying out calculations based upon a GST rate of 3%, attempts are made to demonstrate the resultant tax burden to be slight and negligible. There are 2 failings with this approach. Firstly some States members and political commentators suggest that £200 or £300 a year – here or there – is really no big problem and nothing to get alarmed about. This attitude displays a serious ignorance of the high costs of living in Jersey for people on comparatively low incomes. It is not an exaggeration to say that some individuals and families experience real financial hardship. To some States members such sums may appear to be no more than would be spent on a good meal at a high quality restaurant in St. Helier. To some families the additional labour or cost-cutting needed to find these sums will genuinely lower their quality of life. Secondly, it would clearly be imprudent, unwise and wholly unrealistic to base our decisions in respect of GST upon wildly optimistic assumptions concerning the rate of 3%. The States Assembly must learn to be more long-term in its thinking; we need to proceed on the assumption that the rate will be raised – perhaps significantly if we consider the European comparisons favoured by the Treasury.

Pensioners: the most vulnerable group?

Given the reality that the GST will rise 3  years after its introduction, we must consider the impact on pensioners, many of whom will be on fixed incomes, struggling already to deal with a cost of living higher than central London. It will be bad enough to put 3% on their unavoidable expenditure, let alone the inevitable increases in GST that will be added to essential purchases in the future. In fairness, the very poorest will receive some support in the form of Low Income Support, but many pensioners will remain in a poverty trap, whereby they may have worked hard and have some savings. Their circumstances will prevent them from qualifying for Low Income Support.

How do we compensate for income lost by zero-rating?

If the zero-rating of the proposed items is agreed there will be a loss of revenue from the GST and some additional administrative cost. It is reasonable to assume that this loss of tax revenue will need to be recovered in some way if present States budgeting is to be maintained. It is worth repeating that there are many different approaches to taxation that would work, and the approach that individuals prefer will largely depend upon their political predisposition. Of course some extreme approaches to taxation bring with them profound difficulties. For example, old' Labour style tax and spend policies of the 1970s brought the country's economy to breaking point. One could be forgiven when considering comments from bodies such as the Institute of Directors, and the Chamber of Commerce that Jersey's taxation policies are similarly extreme. The reality is almost the complete opposite. Tax take as a percentage of GDP in Jersey is extremely low; if anything it could be argued that we have an under taxed economy leading to excessive inflation. Consider the following figures –

Country Taxation as % of GDP

EU 15 average 40.6% OECD average 36.3% UK 35.8% USA 26.4% Guernsey 26.8% IOM 40.7% Jersey (pre-tax changes) 21.8% Jersey (post-tax changes) 20.9%

(2 0 0 2 figures supplied by the Economic Adviser to the States)

Of course the way in which these taxes are raised and the distribution burden will differ from jurisdiction to jurisdiction. But what  the figures demonstrate is that  the total tax  burden  in Jersey is the  lowest of these jurisdictions. This means we can consider other tax raising mechanisms of modest proportions, to raise any revenue lost through zero-rating. What might that mechanism be? If essential items were zero-rated, a suggestion is that the rate of GST on remaining items would need to be raised. This is not my favoured option, but it is an approach that would certainly be a workable solution. It would make the GST less regressive as the higher rate would be on far less essential items. Thus those who may be struggling financially could spend on unavoidable items such as health care, basic food stuffs and child care costs, without being taxed on that expenditure. With a higher rate on non-essential items, those with disposable income will be taxed more on non-essential goods and services of the kind that people on higher incomes purchase. Nobody likes taxes, but this approach would be fairer. Raising the rate of GST in this way is of course the Treasury's preferred option in the event of zero-rating being agreed. However, it is not the only option for raising additional revenue and many other mechanisms could be used. Some of these mechanisms are not liked by some States members whose ideological beliefs have led them to reject such proposals in the past. Such Political rejection does not though mean such taxation options are unworkable or unworthy of further consideration.

Such alternative ways of raising tax revenue could include –

• An income tax surcharge;

• Adjusting the Social Security system to be more self-sustaining, to reduce or even phase out the £50  million per annum of central tax revenue the States spends on supplementation;

• Development taxes;

• Windfall tax on commercial property speculation;

• Land Value Tax (The Treasury has yet to produce its paper on LVT);

• Closing of tax loopholes and avoidance mechanism.

These are just a few of the possible approaches to raising additional tax revenue. There will be others. The key point to remember is that the total tax take in Jersey as a percentage of GDP is very low by European standards and lower than both Guernsey and then Isle of Man. Claims that we have no choices available to us when needing to raise taxes simply just don't wash. If the States of Jersey was so minded it could make its tax proposals less regressive – less targeted at the poor – and more progressive – better targeted at those actually able to pay slightly more tax. If the Island's government continues to take a regressive approach to GST – it is because it wants to – not because it has to.

The zero-rated items:

The proposition asks that we agree to zero-rate the following goods and services: (a ) b as ic foodstuffs;

(b ) m e dical services and products;

(c ) ed u cation fees;

(c ) ch i ld care costs;

(d ) li fe insurance policies;

(e ) b o oks and newspapers;

(f ) ch i ldren's clothing.

Food

The cost of basic foodstuffs in Jersey is already very high. This is one of the reasons why comparisons to tax on foods in other jurisdictions are simply not credible when considered in the context of Jersey. Western society has a growing range of health problems related to diet and poor lifestyle. Generally, people are not eating enough fruit and vegetables. We should be encouraging healthy diets, not taxing them. People simply have no choice other than to buy essentials, for example, bread, meat, dairy products, fruit and vegetables. GST on these products is an unavoidable tax on the very foodstuffs people need to eat in a healthy diet. Tax junk food by all means – but don't tax a healthy diet.

Health

It is interesting to note that the comparative information produced by the then Finance and Economics Committee showed that sales taxes upon medical services and dental care was extremely rare, and of the 27 jurisdictions cited by the Committee only 5 had sales tax upon such services. 22 of the jurisdictions exempted medical and dental care entirely. In respect of pharmaceutical products only 7 of the 27 jurisdictions cited charged a sales tax at the full rate upon such products. Nearly ¾ of the jurisdictions applied a reduced rate upon pharmaceutical products – in some cases zero. It has to be remembered that many of these jurisdictions have an extensive range of social benefits in excess of that available in Jersey – there is a better safety net; and the cost of living in Jersey is higher than in any of the 27 jurisdiction cited. The Treasury has repeatedly asserted that"complexity" is to be avoided. If that is the case, it is extremely difficult to see any merit in having different rates of GST for different items. For example a full rate of 3% (or 5%, 10% or 15% in the long term) and a rate of, say 1.5% (or 4%, 7% or 9%) on pharmaceutical products. If we wish to reduce the impact of the GST upon the less well off, we may just as well exempt or zero-rate such items entirely. This would be far less complex than a multitude of differing rates upon a multitude of differing products.