Radical reform to payroll tax could address Bermuda’s growing inequality problems, according to economist Craig Simmons.

The island’s “working poor” — already blighted by stagnating pay packets and declining income — also have to pay a larger percentage of their income in tax than rich people, the Bermuda College lecturer said.

To bridge the wealth gap, he suggested considering negative payroll tax, meaning Bermudian workers could earn tax credits to lift their wages, while high earners would foot an extra tax burden.

Giving his end-of-year assessment of the economy, Mr Simmons said the economy has undoubtedly improved over the past 12 months, but warned indicators such as increased GDP mask the fact many families are continuing to struggle.

He described the Government’s efforts on debt reduction as “so, far so good”, explaining: “Spending is finally under control and tax revenues are rising. The Government is on target to balance its budget in 2018.

“However, the tax system remains regressive: poor people pay a greater percentage of their income in tax than do rich people.

“Payroll tax reform, in the form of a negative payroll tax, could go some way towards correcting this shortcoming.”

Negative payroll tax would introduce a guaranteed income, or earned tax credit, and a flat tax.

Giving one example, based on a guaranteed income of $8,000 a year and a flat tax of 10 per cent, Mr Simmons said a hotel worker earning $37,000 could be given an earned tax credit of $4,300, for a total of $41,300.

Meanwhile, an international business employee earning $100,000 would receive a negative earned tax credit and pay a 2 per cent tax burden of $2,000. As earned income increases, he said, the tax burden would approach the flat tax of 10 per cent.

In his economic review for The Royal Gazette, Mr Simmons also pointed to clear signs of growth in air arrivals, planning approvals, work permit approvals and the size of the labour force.

He noted that inflation-adjusted GDP has increased steadily since the fourth quarter of 2014, with encouraging numbers for the first half of 2016, adding: “Momentum is growing and, as such, it is likely that growth in 2016 will exceed that of 2015.”

However, he continued: “But, GDP is an economy wide indicator. It is suggestive of the economy’s overall health; it hides vital information.

“For example, both average and median nominal incomes are rising, but this can be attributed to people earning over $235,000 a year, according to a Labour Force Survey published by the Department of Statistics.

“Broad indicators thus hide the fact that many Bermudians haven’t seen their pay packets get any bigger in the last year or two. The data support this view: inflation-adjusted median income is still declining. This is particularly pernicious for the working poor.

“If our economic model is to survive, it will have to address growing inequality.

“I think most people earning over $100,000 would agree. Further, most economists see inequality as one of four headwinds buffeting long-term growth.

“However, redistributing income and wealth is a ticklish affair.

“One doesn’t want to disincentivise work effort whether it be at the top or bottom end of the income ladder. Modifying the existing payroll tax schedule to make it more progressive could help.”

Mr Simmons also predicted tax increases could be in the pipeline as Bermuda continues to tackle debt reduction.

Bermuda’s debt-to-GDP ratio is 42 per cent, he noted, compared with the 15 per cent target suggested by the Fiscal Responsibility Panel.

The debt-to-tax revenue indicator is almost 250 per cent, against a suggested target of 80 per cent.

“According to the FRP, it will take 15 years to reach the target,” he said. “If, however, we pursue a more aggressive debt reduction strategy, the target could be reached in eight years.

“Either way, reaching the target will require higher taxes in 2017. The likely candidates are payroll, excise and land taxes as well as customs duties.

“The tax burden — the ratio of tax revenue to GDP — is 16 per cent. This is small by international standards: St Lucia and Jersey have lower burdens; most others — British Virgin Islands, Trinidad, Jamaica, Isle of Man, Guernsey, the Bahamas — have higher burdens.

“If we are to make headway with debt reduction, then the burden will have to rise to about 20 per cent. That should, at a minimum, translate into an extra $100 million in taxes for 2017.”

•For Mr Simmons’s thoughts on the year ahead, see The Royal Gazette today.