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Vat Alternatives 'Don't Generate Revenue We Need'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The private sector’s proposed Value-Added Tax (VAT) alternatives will not generate “the revenues we need” for a fiscal turnaround, a former finance minister argued yesterday, warning: “We’re running out of time.”

James Smith, who is now a key Ministry of Finance consultant, told Tribune Business said the private sector’s payroll tax “trial balloon” was, based on the National Insurance Board’s (NIB) experience, akin to asking the Government to implement a tax “with more loopholes than the current system”.

Echoing the sentiments expressed by Standard & Poor’s (S&P), Mr Smith said the notion that the Bahamas should “delay” fiscal reform to assess VAT alternatives would merely “kick the can down the road”.

Suggesting that the Wall Street credit rating agency’s comments to Tribune Business were “more” than a downgrade warning, the ex-finance minister and Central Bank governor said that “the diabolical thing in this equation” was that the Bahamas’ debt servicing costs were increasing with every day of inaction.

Such pressures, Mr Smith explained, were why he had suggested the “half-way house” of a 7.5 per cent VAT rate.

This, he suggested, would give the Bahamas breathing space by meeting its fiscal needs and rating agency demands, while also reducing VAT’s impact on the economy and allow for assessments on compliance.

S&P on Wednesday told Tribune Business that it wanted to see revenue reforms incorporated in the 2014-2015 Budget, with subsequent “follow through” on execution within the next fiscal year, otherwise the Bahamas’ sovereign credit rating would likely be cut again.

Mr Smith, in response, said the rating agency had been “singing the same tune from when it first raised the flag” over the Bahamas’ looming fiscal crisis and downgraded this country.

The Government’s promise to enact “serious revenue reforms” had bought some time, but S&P was now looking for the Christie administration to take concrete action.

“They’re merely reminding us this has been the position signalled to us well in advance,” Mr Smith told Tribune Business.

“Normally, one would regard it as a warning, but it’s more than that. They’re giving us a heads up, that the ball’s in our court. They’re asking for results, and that we’re making reasonable steps to revenue reform.”

Suggesting that the Bahamas had little time for extensive debate on VAT’s merits, Mr Smith said that all sides - government, private sector and civil society - “seem to be on the same page that something has to be done, otherwise we will go over the precipice”.

“The argument seems to the rate at which we bring about reform,” he added, “should we delay, consider alternative reforms. If we do, you kick the can down the road, but we don’t have time on our side.”

Deferring fiscal reform for any significant period of time, Mr Smith said, would allow the size of the $5.5.billion national debt, and associated interest bill, to increase every day.

The Government’s debt servicing bill for 2013-2014 is just shy of $230 million, and with principal redemption of over $86 million, more than $316 million of taxpayer monies will be spent taking care of public debt.

Most in the private sector have already articulated their opposition to VAT, but Mr Smith said none of the options submitted by the Coalition for Responsible Taxation would produce the desired effect that a broad-based consumption tax promises.

“Many of the alternatives put up as trial balloons won’t give you the revenues you need,” he told Tribune Business. “They don’t seem to at first blush.

“The problem with a payroll tax is that it will only be the established companies, the Government and some of the hotels paying it.”

Mr Smith suggested that a payroll tax, split between employer and employee, would fail to capture the informal economy and be easy to avoid/evade.

He pointed to NIB, which estimated that 90 per cent of self-employed Bahamians failed to make contributions, while adding that a number of lower income earners would have to be exempt.

“On the one hand you can’t accuse the Government of being lax or not collecting taxes, and then introduce a tax that has more loopholes than the one it is proposing,” he told Tribune Business.

“It [a payroll tax] doesn’t leave very much. It’ll fall short of the target that a consumption tax could bring.”

The Government is aiming to generate an extra $500 million in annual revenues by 2016-2017, of which a net $200 million - some 40 per cent - is expected to come from VAT.

While avoidance was possible under any tax structure, Mr Smith said VAT offered the best compliance option. The self-enforcement mechanism created by the need for companies to offset what they paid on their inputs with the output tax, and audit trail created, would reduce evasion.

As for an income tax, Mr Smith said the Bahamas’ had built its financial sector on how to legally avoid this, meaning its implementation would be “like asking the fox to design the chicken coop”.

Acknowledging that VAT was a regressive tax, the former minister said the existing Customs tariff system was the “most regressive”. He added that the former, via an expanded tax base that also captured services, would be more equitable in that Bahamians with higher incomes consumer more in this sector.

“The real problem is that time is not on our side,” Mr Smith said. “That’s why I said the half-way house [7.5 per cent VAT rate] may work.

“Introducing at a lower rate gives you a partial target gain, puts the debt trajectory on the right path, and you can check the compliance rate in a year.”

This, he added, would also buy time to see whether there would be a turnaround in the global economy.

Comments

The_Oracle 6 years, 1 month ago

A bucket is a bucket, and the only bucket from which water can be had is the private sector bucket. The Government bucket, while leaky and unsound, is filled by the private sector bucket. What the Government is proposing is that while Some fill the private sector bucket and some earn water from it, the government has enjoyed a % of the water from it to fill their own. they will now take more. They also refuse to fix their own bucket. The needs of Government outweigh the rights of those who earn their water from the bucket and who fill the bucket. This Taxation regime change is more than just "taking" more from those who earn, it is a flawed philosophical viewpoint coupled with the Power to just take. This is occurring the world over. Government will end up with less, as will the private sector, as will each family and individual. Promising more handouts and assistance to those hardest hit is a short lived capability at best, taking away from the supposed purpose of this increased revenue: Debt Service. at worst, your economic Bucket fails. all else fails after that. That $200 million, is coming out of everyone's pocket. Money does not come out of thin air, just as work does not get done if no one does it.

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MonkeeDoo 6 years, 1 month ago

Extremely well put. Why would anyone even wonder why the public is so much against this ? And the "public" crosses all party and class lines.

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john33xyz 6 years, 1 month ago

Correct. The people who work without paying NIB, the people who only buy bread-basket items, and the people who send their money out of the country - are all HATING the VAT - because they know that more of their money will have to go to the government to help pay for the free clinics and free schools that they attend.

People keep crying over the "poor". The "poor" are people who consume everything, create nothing, and breed like there's no tomorrow. They have 7 children and 35 grandchildren to look after them in their old age. What do you have? You wanna pay for their excess? I don't.

That's why I support a VAT of 10% - and even 15% if that's my only choice. I just hope they don't exempt bread-basket items from it, so those people can't get a free ride on our backs yet again.

I don't see anybody standing in soup lines in Nassau. WHERE are these so-called "poor" people? Tell me what street the soup line is on so I can go and see them with my own eyes.

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hj 6 years, 1 month ago

Of course,not enough revenue to pay for all these foreign trips,the "consultants" and the double dipping.

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Reality_Check 6 years, 1 month ago

This fella Smith would have us believe he bears no responsibility for the failed government policies that have put our country in a dire financial predicament; yet he has been the "Minister of State for Finance" under three Christie Administrations. When has he ever pressed really hard for the PLP government to tighten its belt by shrinking the grossly over bloated public sector? This guy just wants bigger government, more government employee entitlements and increased governments handouts all on the over burdened and nearly broke back bone of the private sector. How can anyone believe anything coming from Smith's lips!

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watcher 6 years, 1 month ago

The Oracle puts it so succinctly - well done Sir (or Madame)

Another reason why this Government is so against a payroll tax is that when fully 40% of all employees earn their living working for Government, it cannot then in effect tax itself by making deductions from payroll, so the only way of finding "new" money is from the water in the bucket brought into this country from abroad i.e. the private sector's bucket.

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The_Oracle 6 years, 1 month ago

From behind the scenes, the alternatives suggested do not give the inside view of our economy, Bank accounts, earnings, Debts. that the IDB, IMF, and Government need to assess how much taxation we can withstand. It took the Government fear of VAT effects on the Public service to reveal the 75+% salary deductions! We have built a house of cards, waiting for a stiff breeze, never mind a hurricane!

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Alex_Charles 6 years, 1 month ago

And when taxes go up so does the salaries for the PM and his ministers, you know to compensate for inflation.......

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SurDavid 6 years, 1 month ago

A VAT of 15% is a regressive tax. The lower class and the poor will pay a disproportionately higher amount in tax because they have a lower overall income.

A much more fairer tax system would be to implement a straight 10% Flat Tax. That way everyone pays the same amount relative to their yearly income.

...you're welcome.

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john33xyz 6 years, 1 month ago

Correct. The people who work without paying NIB, the people who only buy bread-basket items, and the people who send their money out of the country - are all HATING the VAT - because they know that more of their money will have to go to the government to help pay for the free clinics and free schools that they attend.

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Lucybbb 5 years, 10 months ago

The system which will be a good substitute to VAT tax should be carefully considered and calculated. There are many http://www.cashadvanceloanstore.com/">services in the USA which will benefit from VAT alternatives. The only thing is that benefit of all parties of the issue should be considered.

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