The Tribune

By JOHN BOSTWICK II

FNM Senator

The Bahamas now stands at the most significant crossroads in our young nation’s development. The decisions made on our collective behalf by our present leaders shall define the future of our country. The future of each of us alive at present, and of those Bahamians yet to come.

We have come to this point due to what the International Monetary Fund (IMF) described some time ago as ‘ad hoc’ governance based on the presence, or lack thereof, of foreign direct investment. This, I suggest, translates into a lack of planning and the marked absence of local ownership throughout all levels of our major industries, combined with the importation of almost everything we consume. We have arrived here after 40 years of deficit spending; 40 years of spending more than we earn; 40 years of importing excessively more than we produce and/or export, to the point that we are now borrowing to pay debt - as we say: “Borrowing from Peter to pay Paul.”

Hence, we stand at the crossroads facing the festering fruit flourishing in fields sown by seeds of neglect, being forced - if not coerced - into drastic and immediate action. In order to comply with the requirements of outside agencies such as the World Trade Organisation (WTO) and the IMF, and to avoid promised economic downgrading, we, the Bahamas, must act, and act now towards reducing our deficit, lowering our import duties and introducing direct taxation. There is no debate on these issues. The debate is how we achieve these aims.

The Government of the day seeks to do so via the introduction of Value Added Tax (VAT). There are those of us who fundamentally disagree with this, and a growing number who feel that there are, in fact, not only plausible alternatives but are much better alternatives. Alternatives which are true solutions.

After much personal investigation, including detailed discussions with foreign Caribbean-based VAT experts, local business people (from wholesalers and retailers to restaurateurs), as well as, local financial analysts and accountants, I am firmly of the opinion that the implementation of VAT at this time in the Bahamas would be detrimental to our economy and could, in fact, threaten to throw it into a double dip recession. The increase in the cost of doing business in the Bahamas (which is already prohibitive due in part to the extreme cost of electricity) is being heralded as an unbearable, almost hyper-inflationary burden by all sectors of our fragile economy - from the very ports which land over 90 per cent of the goods we consume, to the retailers who make them available to a public that is already cash starved, unable to save and extremely under-employed (some demographic categiries, such as young people between the age of 18-30 years-old, are experiencing as high as 30 per cent unemployment.

It is ultimately this public who will have to bear what is proposed to be a 15 per levy on most goods and services, carried at every level of the distribution chain: Between the importer and wholesaler, the wholesaler and the retailer, the retailer and the people. VAT is an intrinsically regressive tax, as the poor pay the same amount as the rich, which takes a greater portion of the little that they have. It is not a tax to be implemented at times of hardship, where the average person is experiencing the inability to purchase even basic items due to sharp rises in the prices of hundreds of consumer items, due to a new norm in high fuel prices and this administration’s continuous imposition of creative hidden taxes, such as the environmental levy, which more than doubled the cost of certain items such as used tyres and clothes irons overnight.

For the Bahamian people to have to wake-up one morning in July 2014 to the nightmare of VAT and overnight inflation, which is being guesstimated (by all involved) at anywhere from 6 per cent to 25 per cent, would be for them to know that the Bahamian dream had been consumed by a tax tsunami. It is a nightmare scenario that we must avoid.

Employers are already looking at ways to cut costs in anticipation of having to carry the 15 per cent VAT until they can ‘pass it on’. Large wholesalers/retailers, such as SuperValue, have announced the suspension of extensive expansion plans. Other employers are looking at cutting back on staff. There is the very real threat of mass lay-offs as businesses already on the edge of financial ruin seek to cut costs. The travesty of this is that we are presently a service-based economy. Therefore, if jobs are lost in the service industries, service will decline and we will lose customers to serve.

For those in the traditional service industry, the hospitality industry, where we have become used to receiving 15 per cent gratuity, do we really think our tourists, our visitors - whether local patrons or foreign travellers - are going to be willing to pay 15 per cent gratuity along with the mandatory 15 per cent VAT, an additional 30 per cent on their meal or bar tab? I seriously doubt it, as our largely cruise-based tourists often complain about the present price of goods and services in New Providence, as compared to other stops on their cruise packages where their dollars go further.

Add to these very serious concerns the complexity of VAT, and the extreme cost of its implementation and maintenance, and I say that we are a long way from being prepared to entertain VAT. A basic understanding of the system would confirm that the ‘Value Added’ portion of the name refers to real value added to goods and services produced within the jurisdiction. One would think that, as we presently import over 90 per cent of what we consume, it follows that we have some things to achieve before we go down this particular road. It is therefore my humble suggestion that for the reasons outlined, we turn from this dark, desperate road to VAT and seek another direction.

It is an accepted fact that we must act now towards reducing our deficit, lowering our import duties and introducing direct taxation. I add to this that we must also reduce government spending and immediately diversify our economy, widen our stance beyond the two supporting columns of tourism and financial services (which we must redefine, rejuvenate and export), and establish agro-industries producing organic product for export and local consumption, along with renewable energy, and the harvesting of exportable commodities such as aragonite, sand and timber.

The Prime Minister has recently repeated his call for assistance from any person, persons or parties for a solution other than VAT. After much consideration, discourse and debate with local experts, I am comfortable presenting the following suggestions for a direct taxation structure that, if implemented, would eliminate the need to pursue VAT for the foreseeable future while raising more revenue for the Government. The proposals are being regressive (potentially progressive and socially advantageous), and simultaneously will satisfy those external agencies applying pressure beyond resistance.

It is my humble suggestion that we begin the process by acknowledging to ourselves, and to the world at large, that we do in fact have direct taxation in the form of National Insurance and Business License Fees (there are many others, but my focus for the present discussion shall be limited to these two.)

National Insurance is, in fact, an income tax, presently at 10 per cent (with a cap at the high end). It is a tax paid directly out of an employee’s salary by their employer, and present policy now dictates that employers cannot obtain valid Business Licences without a compliance letter from the National Insurance Board. If policed, the system works well and requires the tracking of only 9,000 registered businesses to police the income of our entire national workforce. Business Licence fees are presently calculated as a percentage of the business entity’s gross; it is a corporate (capital) gains tax. It is my suggestion that we begin by calling them what they are: National Insurance becomes National Income Tax, and the Business Licence Fee becomes a Corporate Gains Tax.

The advantages of this renaming exercise are numerous.

National insurance to national income tax

As stated, the system already exists. The cost of implementation is negligible. The methodology exists, the collection scheme is in place and the people are already sensitised and accustomed to the deduction/contribution being taken from their salaries.

As I see it, the National Income Tax would be tiered and it would vary from 7.5 per cent to 15 per cent, depending on a person’s income and residential status (with foreign residents paying at the higher end of the scale). There would be no cap at the high end, and persons of low or no income would potentially be entitled to a refund or exempted for a period.

The onus would be placed on the employer to collect and remit this payment. It is my suggestion that three separate funds be established to receive portions of the revenue collected in order to continue, modernise and expand that which National Insurance presently represents: the National Pension Fund, the National Health Plan and the Income Tax Fund.

Employers could be given options to contribute in greater portion to the National Pension and Health Funds on behalf of employees and offered credits elsewhere such as on their Corporate Gains Tax discussed herein below.

The changing of National Insurance to National Income Tax removes the perception that the Bahamas is a “Low to no tax” jurisdiction where there are no direct taxes.

This will go a long way toward satiating those external forces. Further, it is my suggestion that, contrary to what some may argue, such a definition would be pleasing to many of our foreign residents who could then claim the advantage of the Double Taxation Treaties which we are now party to, an advantage that VAT cannot claim to afford them.

Recent discussions with noted financial experts suggested that if it were implemented using the existing National Insurance system as re-tooled, such a National Income Tax could raise an additional $200-400 million while funding a National Health Plan and National Pension Fund.

Business license fee to corporate gains tax

As stated, the Business Licence Fee is clearly a tax and many argue that as a percentage of gross (no matter how small) it is potentially very onerous to businesses whose costs might overrun and erode or erase profits.

It is my suggestion that we also institute a Corporate Gains Tax (with the emphasis being on ‘gains’ as I suggest we tax ‘net’ not ‘gross’ profits as we seek to encourage growth in small to mid size businesses which employ the greatest number of people in our economy).

It is right that we tax corporate personalities in the same manner that we tax the people and therefore I suggest similar rates, 7.5 per cent – 15 per cent depending on the net income, as well as the residential status of the beneficial owners of the business entity.

As with the National Income Tax and National Insurance, the system already exists; therefore, the costs of implementation, including the education of those to be effected, would be limited.

One system could police the other as they presently do and we could track the income of our entire workforce via the active policing of our 9,000 businesses.

And, should we do it, it has been estimated that we could raise an additional $300-500 million in revenue via such a Corporate Gains Tax without looking at VAT.

Again, the introduction of a direct Corporate Gains Tax has the double positive effect of addressing many of the issues being raised by external trade groups and rating agencies while at the same time allowing foreign owned businesses the ability to claim the benefits available due to our being party to Double Taxation Treaties whereby they can claim certain exemptions in their home jurisdictions once it is clear that they are being taxed directly here in the Bahamas where they are registered.

Sales tax

The final form of direct taxation I suggest we consider at this time is Sales Tax on goods and potentially some services (tour packages for example).

While it may appear that a sales tax is similar to VAT, they are drastically different in that a sales tax would only be implemented at the point of consumption and not throughout the chain of distribution as a carried cost at each stage.

It would be my suggestion that such a tax could be extremely varied with breadbasket items attracting no sales tax whatsoever.

Bahamian-made or produced items could and should be taxed at a lower rate with import duties maintained or increased for competing items so as to encourage local production of at least green grocery items.

Certain items such as cigarettes, imported alcohol, trans-fats and imported raw sugars should be super taxed due to the high rate of diabetes, high blood pressure, hypertension, heart attack and stroke, cancer and other aliments which place a burden on our health system and otherwise contribute to obesity and other social ills plaguing and costing our society.

Apart from having the potential to raise what has been estimated to be an additional $200-400 million, such a Sales Tax, would be yet another direct tax further eroding the argument that the Bahamas is a no to low tax jurisdiction.

It would also have the effect of enabling us to begin lowering our customs import duties as we apply Sales Tax at the till.

This too would appease, if not fully satiate those external forces who wish to see lower import duties, direct taxation, increase in revenue and the resulting ability to lower our deficit and pay our debts which when the resulting income is combined with that of the National Income Tax and the Corporate Gains Tax as briefly outlined herein is not merely plausibly feasible, it is an achievable reality.

It is my humble suggestion for the reasons briefly outlined herein that VAT is not only the wrong choice at this time, it is a potentially devastating choice. It is inflationary, regressive and has the real potential of causing the loss of hundreds, if not thousands, of jobs as employers seek to cut cost in the face of having to carry a substantial cost increase until they can pass it on.

In short, it will bleed the poor of whatever little they have left and wound the middle classes, many of whom are barely surviving.

The second and third parts of this discussion, which really centre around the need for us as a nation to immediately address ourselves to our deficit are: the reduction in government expenditure and the diversification of our economy toward increasing our gross domestic product with regard to local consumption and export.

We must approach this junction with the intent to address it holistically as our present situation rests not only in our failure to adequately maintain a functioning tax regime, it rests also in our: failure to collect existing taxes; failure to limit government expenditure; failure to promote an ultra efficient streamlined privately contracted civil service rather than an ineptocratic, cronistic, overstaffed, unionised, entrenched government workforce; failure to diversify our economy; failure to promote and secure Bahamian principal ownership thereby retaining profits rather than leaking foreign reserves in the form of profits belonging to all of the direct foreign investors who borrow Bahamian money, secured by Bahamian land, to fund their investments before converting and repatriating them (the profits), as well as, our failure to promote agro-industries so that we would be food independent, exporting rather than importing agricultural items.

It is clear that whichever road we chose the destination needs to and will involve taxation; however, as we embark upon this journey and enter what is seen to be new territory we must take care to be the masters of our own destiny. It is my suggestion that we look around and simply realise that we have had what we needed at our hands and in use all along.

We can begin this new era of existence as a direct tax nation with a smidgen of confidence by ‘fixing up’ what we already have; and using methods and systems which the people are accustomed to and comfortable with.

As I stated at the outset, the choices made over the coming months will define our Bahamas for our and our grandchildren’s children’s future. The path I have outlined is one toward Bahamian ownership of our future in our Bahamas.

We as Bahamians cannot sit idle this time. We cannot be overcome with apathy nor can we stand trembling with fear and trepidation. We do not need to swallow what we are being forced fed. We can put our own plan of action on the table, layout our own charts and plot out our own destination moving forward, upward, onward, together instead.