The economy of Jersey

My School career ended yesterday as i returned from a four day cricket tour with the school 1st XI from jersey. Jersey is a British Crown Dependency and so it is not part of the United Kingdom but is very similar to the UK as the equivalent to the Prime minister, known as the Baliff, is appointed by the British Monarch (i.e the Queen)

As a budding, young economist i was quite keen to look into the economy of Jersey when i got home and in particular, the taxation system of jersey as i had heard that is a popular home to high earners who are keen to avoid paying UK income tax rates.

There are a few key features of the taxation system in Jersey which makes it significantly different to that of the UK.

Firstly, there is no progressive taxation system in Jersey but rather a flat tax for income tax levied at 20%. Many economists, including probably The Amateur Economist, would not agree with this system as they would see it as a less equitable tax which would inevitably penalise the lower earners. They would argue that this would lead to a more unequal distribution of income ( and therefore a higher Gini coefficient) which could propose social difficulties. However, i see a flat tax as an opportunity for workers to maximise their income as the marginal rate of tax is constant and so workers are incentivised to work harder to increase their income.

Secondly, in Jersey there is not VAT imposed on goods. This means that goods are considerably cheaper over in Jersey than in the UK. This has lead to an increase in tourism as residents of the UK and France will pop over to Jersey and purchase luxury items such as watches and jewellery which would be considerably more expensive in the UK with VAT. The lack of VAT on goods has also lead to an increase in exports of goods from Jersey as the goods are cheaper than domestically produced ones. If countries wanted to stop this inflow of Jersey goods than protectionist techniques such as a tariff could be imposed. In recent years the government of Jersey has brought in a Goods and Services tax which is similar to that of VAT but is levied at a much lower rate and still therefore allows Jersey goods to be cheaper than those in the UK.

Finally, all Jersey businesses exempt those in the financial sector do not have to pay corporation tax (a tax on profits) and so once again firms are incentivised to maximise their profits. The firms in the financial sector pay a flat corporation tax of 10% and this is still a relatively low rate of tax.

So, the tax system of Jersey seems to be a much more free market approach than that of the UK as enterprise seems to be rewarded via lower income and corporation tax. This means however, that the role of the state in Jersey is much less as there is lower tax revenue and so support for the lower earners is reduced. This may lead to a much higher disparity in living standards on the island and i saw this to a certain degree when i visited. It appeared that the Jersey locals were performing the lower paid jobs whilst the immigrants who had moved to the island to benefit from the tax breaks were living the life of luxury.