The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Tax Coalition co-chair yesterday questioned why the Bahamas was rushing to “immediately” replace $300 million worth of Customs duties, when the rules-based trading regimes it is joining allow such change to be phased in.

Gowon Bowe said there was “nothing” he had seen in either the Economic Partnership Agreement (EPA) or World Trade Organisation (WTO) rules that required nations to do away with such tax regimes in one fell swoop.

“The other side [of tax reform] that the Government needs to focus attention on is the WTO and EPA,” Mr Bowe told Tribune Business.

“If the agreements say we have to replace these taxes, they have to demonstrate why it needs to happen immediately, instead of phasing it in over time.”

He added: “There’s nothing I’ve seen to suggest we have to reduce import duties immediately by tax changes, so we should be looking to phase them in and ready persons for it.”

Of the $500 million the Government is projecting to raise from the Value-Added Tax (VAT) it plans to implement on July 1, some $300 million is earmarked to replace the Customs and Excise duties that will be simultaneously reduced to make way for the new tax.

While tax reform is ostensibly being driven by the need to eliminate the Government’s recurrent fiscal deficits, and reduce the national debt, the Bahamas’ moves to join rules-based trading regimes is the other driver lurking in the background.

The likes of the WTO view import tariffs, and border duties, as a barrier to trade, and require member nations to remove them.

The need to raise $500 million, and replace the $300 million worth of duties, was yesterday cited by Michael Halkitis, minister of state for finance, for the Government’s likely rejection of a 5 per cent payroll tax as a VAT alternative.

That option has been championed by the Coalition for Responsible Taxation, which has argued that it could match the net $200 million revenue increase from VAT by generating $190 million.

But, alluding to the need to replace existing import tariffs, Mr Halkitis said a payroll tax would have to be set at a higher rate than 5 per cent, given that the latter would achieve “only half” the Government’s revenue targets.

Responding to Mr Halkitis’s payroll tax comments, Mr Bowe expressed hope that these were based on empirical analysis or data.

While economists had told the Coalition that an income-based tax would negatively impact consumer purchasing power, Mr Bowe said a payroll tax would have much less inflationary impact than VAT.

“The general rule is that if you have a 15 per cent VAT, you will have a 7-8 per cent increase in prices,” he told Tribune Business, adding that this was a “low end, conservative estimate”.

But, with a 5 per cent payroll tax, assuming labour accounted for 50 per cent of a business’s total operating expenses, Mr Bowe said this would translate into a 2.5 per cent price/cost increase that was “not as significant as a 7-8 per cent price increase with VAT”.

With any new tax set to impact prices, Mr Bowe said the issue was how to “manage” inflation to the point it did not harm consumer demand and consumption, while also allowing the Government to hit its revenue targets.

“What will be the right taxation to achieve what we want without having a negative impact on consumption?” he asked.

Mr Halkitis yesterday said studies by the Inter-American Development Bank (IDB) had shown that a 15 per cent VAT would produce a one-time 4 per cent spike in prices during the first year, with this effect moderating in subsequent years.