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Monday, 13 January 2014

Effective Rate of Taxation - Alternate Methodology

We have had a fantastic response to the previous blog posting and I am most grateful for the suggestion of a far easier method of calculating the effective rate of taxation suggested.

For this calculation we use different source material the budget for 2014, draft budget statement for 2013 and the 2012 Financial Reports.

Budgeted Taxation
Income Tax      £474,965,000
Impots -             £55,191,000
GST -                £81,955,000
Stamp Duty -     £27,402,000
Island Rate -      £12,032,000
Other Income -  £21,926,000

Total Income    £673,471,000


The 2014 Draft Budget shows there were 39,740 households in Jersey paying tax on 2011 earnings and in 2012 Income tax from individuals was collected in the sum of £354 million pounds and that £80 million pounds was paid in Company tax in the same period.

If we apply this same split to the 2014 figures then individual income tax can be calculated to be approximately £387,500,000.

So an average household is paying £9,750 in income tax.


Applying the same method to all the other taxes

IMPOTS - An 'average' household is paying £1,389
GST - An 'average' household is paying £2,062
STAMP DUTY - An  'average' household is paying £690
ISLAND RATE - An 'average' household is paying £303

So an average household is paying £4,334 in other taxes

Other income we shall consider later on but the equivalent contribution that each household makes (largely in either profits for the States owned utilities (a form of taxation I had not considered in the last post) or in the retention by the States of the public's money in the form of interest and bank accounts which the taxpayer might otherwise have generated for themselves is £552


One anomaly thrown up was that I had not considered whether a person on 'average earnings' would be on the marginal rate. It transpires they would be. A person earning £34,320 would with the single person's allowance of £13,780 be subject to tax at 27% on £20,540, £5,546 or an applicable rate of just over 16%.

Therefore the net income (after ITIS and SS deductions) of the individual would be £26,770. If we apply the same methodology to calculate the number of persons per household then we derive a figure of 1.4 individuals per household.

However it has been pointed out that the weekly household expenditure figure excludes the Other Expenditure line from the survey and that it should include it. This raises the annual household expenditure to £39,740 which would lead to a figure of 1.48 individuals per household.

Which means that each individual is paying £9,516.21 in the above five taxes each year at an effective rate of 27.8%


I have not changed the method of calculating the rate of taxation I apply the full 12.5%, if you do not agree with this methodology, it is easy enough to adjust to just include the 6%.


Therefore we can see that the effective rate of taxation using this methodology is slightly lower at 40.3%


What we have not included is parish rates (other than the all island rate) and any tax which is collected by a department other than the Treasury department in other words the 'user pays charges'; planning fees, parking charges, licenses etc. I have not been able to track down any figures for the amount of money that individual departments collect and retain within their own department.


We know that by 2018 the effective rate will increase with the introduction of a new tax at 1% limited to the social security cap (so a full 1% at 'average' earnings). Do you trust the government not to raise the rate of GST in the next session?

Compare to 1980 the effective rate of taxation has increased out of all recognition. A government which is managing the public's money need never increase the rate as the amount of money collected will still increase as wages and prices increase.