Cayman Islands Proposes First Ever Income Tax On Expatriate Workers

The Cayman Islands may get an income tax soon, but the rich need not worry.

In an effort to balance its budget, the Cayman Islands has proposed its first ever payroll tax -- a 10 percent payroll tax on expatriate workers earning more than $24,390 per year. The government is calling the tax a "Community Enhancement Fee," and it still is negotiating an agreement on the final budget. (h/t Forbes).

The Cayman Islands' website currently boasts that "there are no direct taxes in the Cayman Islands," including "no income tax, company or corporation tax, inheritance tax, capital gains or gift tax," and "no property taxes or rates."

This new tax wouldn't impact most wealthy people that count on the Cayman Islands as a tax haven. That's because the tax wouldn't apply to corporate incomes or foreigners' bank accounts. The super-rich hold up to $32 trillion, or 46 percent of the world's total economic output, in tax havens such as the Cayman Islands, according to a recent report.

While the new income tax would allow the Cayman Islands to maintain some social services, it would be a raw deal for lower-income expatriate workers, such as tourism workers from abroad. Workers earning little more than $24,390 per year will have to pay the same flat tax rate as multimillionaires working in the Cayman Islands.

Many economists argue that a flat tax rate hurts the poor more than the rich. The thinking goes that a worker making just $25,000 per year would have to spend less on food and other necessities because of a 10 percent income tax, while a hedge fund manager making millions of dollars every year wouldn't see his consumption habits change much.

CORRECTION: A previous version of this article incorrectly stated that the Cayman Islands just imposed a new payroll tax. The Cayman Islands actually just proposed a new payroll tax, and the government still is negotiating the final budget.