New tax policy at private sector’s expense
If the current personal income tax proposal is implemented without substantial changes, it could create untold problems for the private sector, way beyond those which the Government is about to experience.
It is well established that persons earning just over $1.5 million and up to $1.8 million would be better off taking a pay cut, limiting their income to the threshold amount of $1.5 million. This gap between $1.5 million and $1.8 million represents a significant 20.5 per cent on the threshold level, and there lies the genesis of the problem.
In many organisations, the $1.5m-$1.8m wage range represents lower-tier supervisory levels. In some cases, there could be as many as three levels within this band. These persons are likely to be represented by staff unions who may proceed to make compensatory claims so as to fix the problem. An unfavourable response is likely to lead to some disquiet at this critical level within the organisational structure.
The average annual wage rate increases by about 4.0%, and so under normal circumstances, it would take an employee five years to move from $1.5 million to $1.8 million, save for merit increases. Without more, employees at $1.5 million would be better off foregoing wage increases until they are able to justify a quantum leap adjustment from $1.5m to above $1.8 million. This will cause wage stagnation.
In an effort to retain exceptional employees, employers would want to accelerate this process, but at the expense of other employees who deserve a wage rate up, but not beyond $1.8 million. It is, therefore, likely that the wage range between $1.5 and $1.8 million would be avoided, creating a distortion in the progression of income levels, particularly for many young professionals. This could create very serious morale problems.
IMPACT ON PENSION BENEFITS
The impact on pension benefits could be substantial and varied. Persons who seek to have their income reduced to $1.5 million will ultimately see a reduction in their pension. Employees nearing retirement and part of a final salary scheme could see their pension reduced by as much as 20 per cent. At the same time, those in money-purchase schemes would see a reduction in pension contribution by as much as $60,000 per annum.
Persons earning less than $1.5 million would want to ensure that their annual bonus is limited to the difference between their current wage and $1.5 million. Persons earning $1.5 million would refuse any bonus payment less than 20%. Similarly, employees at or about the $1.5 million would avoid overtime work, as the added gross income would cause a reduction in take-home pay. The same principle would apply to pay in lieu of leave of any kind. Incentive would diminish, creating a very difficult working environment, impacting significantly on productivity.
Depending on how the legislation is drafted, a taxpayer may have a plausible case if this matter is challenged in the courts. The fact that one dollar in additional income could yield a tax obligation of $217,000 is patently unreasonable and unjust. However, the argument becomes less forceful for those earning above $1.8 million.
In 1980, when the Government instituted changes in the tax regime to housing and other allowances, many companies proceeded to apply tax equalisation in order to restore take-home pay and thereby alleviate the impact on the employee.
The current situation is not dissimilar, and the importance of staff morale will make it incumbent on companies to mitigate the effect of this distorted tax scheme. Large corporations, in particular, may require a comprehensive review of the compensation policy so as to restore equity within the wage structure and work around this null band between $1.5 million and $1.8 million. Those who ignore this do so at their peril.
At the end of the day and notwithstanding the follies of the administration, employees will look to the employers to fix the problem. This fix could be extremely costly.