By NEIL HARTNELL
Tribune Business Editor
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.