Is Our Tax System Progressive or Regressive?

An interesting debate broke out in Keys this week as the man from the Treasury and the leader of the Manx Labour Party traded views on the island’s tax system.

Joney Faragher had sought to ask David Ashford what his policy is on progressive taxation, but it turned into a rather more rounded debate about the island’s tax cap.

Mr Ashford said that he ‘generally’ is in favour of a progressive tax system and highlighted that the island had a tax-free allowance, a 10% tax rate, 20% tax rate and self electable tax cap of £200,000.

He added: ‘Taxation is an important part of any Government’s economic tool kit. It needs to be attractive for the individual and businesses to move to the Island in order to create and take up employment, whilst at the same time balancing this against being able to fund services that our residents and businesses expect. That is why it is vital for us to have an Economic Strategy for the Island. Overall, I consider the tax system that we have in place, which includes an Income Tax system with tax-free allowances and a lower rate for those on lower incomes, is both fair and competitive, and essential to maintaining the economic success of the island.’

Regressive

However, Ms Faragher disagreed and said that a ‘regressive tax system like the one we currently have hits the poorest hardest’. The Douglas East MHK expanded to say that our current system takes the highest percentage of income from the lowest earners while some of the richest pay the lowest proportion of their income in tax.

She added: ‘Research consistently shows that progressive taxation brings about not only greater income equality but a higher level of happiness in the lowest 40% of earners; and, very interestingly, without reducing happiness levels in the top 20%. Would the Minister agree with me that (1) raising the tax cap, and (2) making our tax system more progressive and less regressive, would be a good thing for the island?’

Unsurprisingly, Mr Ashford rejected the notion of a regressive taxation system, saying that he thinks the island’s tax system is progressive.

Tax Cap

While the island’s tax cap was £100,000 in 2006, it has since risen to £200,000.

Mr Ashford said that there are ’68 tax caps on the island of which 11 are capped at the current rate of £200,000. Of the 68 current caps, 44 are currently still at the cap of £125,000, with elections ending on 5th April 2022′. He added: ‘We would estimate that a higher number of tax cap elections ending in 2022 will not re-elect for a further tax cap, due to the increase to £200,000.’

Tax-cappers have the ability to elect for five years – and they also, since last year, have the ability to elect for 10 years as well – we do have to remember they are making a commitment to pay that amount each and every year, regardless of what their income actually is.

Strategy?

Douglas Central MHK Chris Thomas ask the Minister whether ‘given his strong statement in favour of our type of progressive taxation, that it would be worth adding progressive taxation as an overarching aim of the current Manx Taxation Strategy’?

Mr Ashford said this showed why the island needs a ‘very defined economic strategy’ and that it would be considered as part of the economic medium-term plan that is being developed.

He added: ‘But just before I sit down, Mr Speaker, I should point out in my previous answer to the Hon. Member for Douglas East, which I missed off, although the ITTP amounts have been increasing each year, that is across the board. There is no evidence that it has come fundamentally from the fact that the tax cap has increased; and, in fact, the number of electors has actually gone down, which is my understanding, since the amounts of the tax cap have increased.’