The Tribune

By RICHARD COULSON

At last we have it: The Government’s recently published ‘Summary and Explanation of the Draft Legislation’ is a solid, workmanlike summary of the proposed Value-Added Tax (VAT) regime. Of course, it does not answer every question or satisfy every interested party, but at least it has the virtue of laying out clearly the points to be argued.

These include:

• The domestic airline industry can question why it should be subject to VAT while land and water transportation will be exempt – a key point for private companies serving the Family Islands in competition with subsidised Bahamasair. .

• While exemptions from electricity charges will be granted to low-use residential consumers, hotels and commercial users can complain about VAT added to their ruinously high power bills until, at some speculative future date, BEC may (possibly) be reorganised to reduce its cost structure.
  

• Restaurants outside hotels will object to adding 15 per cent VAT to their diners’ checks, while hotel restaurants will only add 10 per cent.

• The real estate industry has queried why certain rental businesses will be subject to a $50,000 sales threshold rather than the standard $100,000.

• And, of course, nothing, not even a rough estimate, is given as to the salary and administrative costs of the new Central RevenueAdministration (CRA) and its Commissioner. Presumably, most of the staff will be expensive new hires and not simply departmental transferees.

All the above issues can be resolved and clarified before VAT becomes law and is imposed, at whatever final level is decreed.

Unfortunately, the Summary and Explanation, useful as it is, tells the Bahamian public nothing about the essential underlying objective “to return the public finances to a sustainable and prudent state” (page 2). VAT, or any other type of taxation, represents only part of the entire budgetary process relating to revenues: It says nothing about expenditures.

What Bahamians want to see, before they give any blessing of VAT, is for the Christie administration to give a clear and detailed explanation of how the ever-rising category of current expenditures will be attacked, plus steps to improve efficiency and encourage investment. The Coalition for Responsible Taxation is already working on specific proposals.

Perry and his minions at the Ministry of Finance have gone to great lengths to write and publicise the Summary. But it gives no hint that Government is actually focusing on reducing expenditure – quite the opposite. The preamble on page 4 simply states that “Government must have access to revenues that adequately fund both current and future needs of its citizens”. In other words, the state will continue to encourage and pay for these needs, with no suggestion of a policy that would analyse the “needs” and find that they are simply self-serving preferences of a society that has learned to depend on Government hand-outs.

Even worse, the summary tells us on page 13 that as a result of VAT’s impact on the cost of living, the poor will be hit hard and “Government would boost targeted spending on social assistance to low income households”. This requirement is confirmed in the recent detailed VAT analysis by the Inter-American Bank (IDB). In other words, long before VAT kicks in with its presumed beneficial effects, a few years down the road, the very first result will burden the Government with a new, and unquantified, subsidy on top of the many it is already paying.

The Government has taken great pains to prepare the VAT Summary and Explanation, as well as the draft legislation and regulations, and is holding educational meetings to prepare future taxpayers. It should be at equal pains to explain in detail how it proposes to chip away at its expenses budget, and take steps to improve the investment climate of the Bahamas. It was good to read a recent release from Minister Halkitis saying that expenditures declined during the latest quarter, but that is a long way from presenting a wide-ranging budget tightening programme.

To date, Bahamians have never seen any ‘White Paper’ giving official responses to questions that are uppermost in their mind:

• What efforts, if any, are being made to reduce at least some portion of the outstanding $540 million in real property taxes due and unpaid? Are there insuperable obstacles to enforcing collection? Surely some projections of estimated repayment of this huge receivable can be made.

• After many years of paying an indefensible annual subsidy, averaging around $20 million, to keep Bahamasair flying under state ownership, are there any current proposals that would result in getting the company off the Government’s books? If negotiated wisely, the country’s privately-owned airlines could gradually take over all Bahamasair’s operations, leaving the Government to assume its indebtedness to be repaid over number of years. Sure, there would probably be a modest reduction in staffing, but adequate severance payments would cost less than continuing the subsidy. All that is needed is political will, and a decision to overcome the long-standing objections to the bogey of ‘privatisation’.

• The same question applies with even greater strength to the Broadcasting Corporation of the Bahamas. How can the Prime Minister possibly defend money-losing ownership of a venture that is nothing but a propaganda machine for the Government?

Yes, we need a national TV and radio station competing with Cable Bahamas, but we have any number of experienced private executives and staffers in this field who would jump at the opportunity to take over BBC’s operating license, running it professionally as an independent news, entertainment and culture source on professional lines, which would drop incompetent political hacks and hackettes. Again, severance payments would be the order of the day, replacing continuing subsidies.

• The recent IDB country report and other studies have continually zeroed in on deficiencies in our land registry system and clumsy bureaucracy that slows up the granting of construction permits, two factors that put a serious brake on new investment projects, whether domestic or foreign-sourced.

Why has Government not made a formal response to these points? New investment has an indirect, but quickly felt, impact on the national accounts, bringing higher employment and tax revenue, and lowers the need for social services paid for by the Treasury.

• Why does Government continually resist any suggestion that it try to reduce public sector employment, or any admission that there might be over-staffing or under-performance that could justify a careful weeding out of staff? The official policy seems to be locked into a view that it is somehow “un-Bahamian” to reduce the public payroll by giving out some pink slips.

A policy of staff reduction is common in our private sector when economic circumstances require. Why should the state be exempt from the normal rules that govern the effectiveness of any organisation? Redundancies need not be executed in a heartless manner for employees who have become accustomed to life-long tenure at the public trough. Severance arrangements can be negotiated, which will in the long run cost less than the continued retention of unneeded slots and under-performing time-servers.

If the Government were to produce a White Paper addressing the above points, a ‘Deficit Reduction Programme’ of equal weight to its existing efforts on behalf of VAT, Bahamian businesses and the general public would be better educated why there may be a need for additional tax revenue. At the moment, public opinion is left in the dark about how Government could save money and, in the barn yard phrase, is asking them to buy “a pig in a poke” in accepting VAT.

In fact, a Deficit Reduction Programme (DFR), if carried out with vigour and determination, might demonstrate that no new taxes are needed, even after Customs Duties are reduced to permit our entry into the World Trade Organisation (WTO). An interim solution to fund immediate revenue shortfalls may be to introduce VAT next July at a lower rate than the announced 15 per cent - say, 7.5 per cent - giving time for a DFR to be executed, and for alternative revenue measures to be considered. This columnist has often argued (and is now finding many supporters for) that some form of income tax is preferable, since it is more equitable than regressive consumption taxes such as VAT and could be put in place, as in Panama, without endangering our position as an offshore financial centre.

In short, the Bahamian public has good reason to resist its elected representatives pushing them into VAT in its present form - as Perry Christie, a consummate politician, doubtless recognises.