100% living cost slash

from sales tax switch

By NEIL HARTNELL

Tribune Business Editor

THE Bahamas could slash living costs by 100 per cent yet still maintain government revenues through switching to a Sales tax, a well-known doctor and financial executive has argued, unveiling a four-point reform plan to "dramatically" lower this nation's cost structure.

Dr Jonathan Rodgers, the well-known eye doctor, in a strategy document sent to Tribune Business, said that apart from reforming the Bahamian tax structure's over-reliance on import/Customs duties, the other key elements involved lowering the cost of capital (interest rates) and ending the commercial banking "oligopoly"; ending the utilities "cartel" and reducing costs here; and exchange control liberalization combined with "dollarization" of the Bahamian economy.

Dr Rodgers argued that a living cost-reduction strategy would have the greatest short-term impact on the Bahamian economy and its citizens given the current global environment, where widespread uncertainty over the pace and extent of recovery meant private sector and government top-lines (sales revenues) were likely to be subdued for a long time.

While the likes of China and Singapore were recovering faster than many other economies, Dr Rodgers said they had been able to do so through their export capabilities and high level of private/national savings, qualities the Bahamas lacked. "The Bahamas has both a national and private savings deficit or, stated another way, an excessive debt load," he added.

Setting out the case for a switch from customs duties to a Sales tax, Dr Rodgers used the example of a good costing $100 in Florida. After allowing for freight, insurance and customs duty costs, its landed cost in the Bahamas could well amount to $150, he argued. If the retailer added up to a 30 per cent mark-up, then its cost to the end Bahamian consumer could well be around $200 - twice the price, or 100 per cent more, than what Florida consumers paid.

Yet if the current duties system was abolished, even allowing for freight and insurance costs, Dr Rodgers said a 10 per cent sales tax in the Bahamas would leave the same product's cost at $110, compared to $106 in Florida (allowing for Florida's own sales tax).

The minimal price differential, he explained, would remove the incentive for many Bahamians to travel to Florida every year for shopping. "The Bahamas needs to immediately change its tax structure and move from import duties to a sales and service tax system," Dr Rodgers argued. "If such a system were to be adopted, then the cost of living would be reduced by almost 100 per cent, and the Government would still maintain its current revenue of $700 million from import and stamp duties.......

"Because of the much reduced cost of the item to the Bahamian consumer, the value of his or her income would increase, as the same item could now be purchased for almost half of the old pre-sales tax price of $200. An additional bonus to the economy would be that after consumers adapt to their new-found increase in purchasing power, fewer persons would travel to Florida, where they spend an estimated $500 million to $1 billion each year. Due to the velocity of money, a concept that refers to the fact that every dollar spent will circulate four-five times before it results in something being imported into the country, this $500- $1 billion becomes $2.5-$5.0 billion circulating in the economy."

This would increase economic activity, further boosting the Government's revenue in areas such as business licence fees and real property taxes, which are heavily dependent on a strong private sector.

To ensure the Government's tax structure properly captured the service sector, something it currently does not, Dr Rodgers suggested that a 10 per cent service charge be introduced for all services-type transactions. So, if a doctor's visit currently cost $100, a 10 per cent fee would be added to it, increasing the cost to $110 and giving the Government $10 in revenues.

"This service fee would have implications for the tourist industry, as the sale of vacation packages to tourists would be subject to the same 10 per cent service tax. Thus the Government would have the opportunity to receive 10 per cent of the revenue generated on the sale of all vacation packages associated with hotels in the Bahamas," Dr Rodgers argued.

"As well, when the cruise ships are docked in the Bahamas, any sales made on board would be subject to Bahamian sales tax of 10 per cent, as is the case in Alaska. This added government revenue would go a long way to increasing the anemic $0.15 on every tourist dollar that the Bahamas now receives."

Elsewhere, Dr Rodgers argued that Bahamians had "paid a high price" for the exchange control regime, since it had forced them to always obtain "expensive" Bahamian dollar funding and denied them overseas investment opportunities.

He recommended that the Bahamas "dollarize" or adopt the US dollar as its national currency, arguing that it would "cause a further 15-20 per cent reduction" in the cost of living. Adopting a multi-currency basket of currencies for circulation in the Bahamas, such as Canadian dollars, the Japanese yen and Chinese yuan could also be beneficial, given that these were the nation's major trading partner.

And on the utilities front, Dr Rodgers suggested the Bahamas use mini-nuclear units the size of a refrigerator for power generation. Arguing that these had been proven safe and were placed underground, her said one could supply electricity to up to 20,000 homes.

"Each unit costs $25 million and can supply power at the rate of 10 cents per kilowatt hour. As there are approximately 60,000 homes in the Bahamas it would take three of these units to meet our entire power needs," Dr Rodgers wrote.

"As well, if two additional units were purchased then these could also be hooked up to the power grid and supply power to the gas stations, which could become power recharging stations for the new electric and hybrid cars which are now available."

Such developments, he added, would also help the Bahamian tourism industry, as it cost hotels $37 per room, per day in BEC bills. Mexico, by comparison, was offering hotel package tours at $35 per day.

See The Tribune and Tribune Business later this week for the full text of Dr Rodgers' proposals...

Published On:Monday, March 15, 2010