The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The fiscal policy reform dilemma facing the Government was yesterday highlighted by a private sector study, which found that while the tourism industry would “fare better”under a payroll tax, the opposite was true for Bahamian households.

The Oxford Economics study, released by the Coalition for Responsible Taxation, found that the Bahamian tourism industry would enjoy faster growth rates under either a 6 per cent or 12 per cent payroll tax that was split 50/50 between employer and employee.

Yet the same study also found that implementing either of the payroll taxes would result in employment levels that were 0.3 per cent, and 1 per cent, lower respectively by 2024.

This is because a payroll tax would act as a disincentive for Bahamian companies to hire, and also result in reduced take home pay for workers.

As a result, the Oxford Economics study found that Bahamian households would be “worse off” under a payroll tax when compared to Value-Added Tax (VAT).

This, of course, creates a huge policy choice for the Government - whether to favour the country’s largest industry, which generates around 60 per cent of GDP and 108,000 jobs, or Bahamian households that are responsible for voting it into office.

“Tourism-facing industries, most notably hotels and restaurants, would fare better from the introduction of a payroll tax compared to VAT, other things being equal,” the Oxford Economics study found.

“Households will be worse off under a payroll tax compared to VAT, with net take home pay affected directly by employee contributions, and indirectly by employer contributions, as firms seek to shift the incidence of the tax back on to workers over time.”

And, while many have been calling for the Government to keep VAT ‘exemptions’ to a minimum, in order to keep tax rates low and the base broad, the Oxford Economics study warned that doing so would place a greater burden on poorer Bahamians.

“Our analyses suggest that the impact of introducing VAT with a narrower range of exemptions would increase the incidence of the tax on lower-income households, other things being equal,” the report found.

“However, if a sufficiently accurately targeted compensation package could be designed, this would represent a more efficient means of offsetting the regressive impact of VAT than the use of exemptions.”

Under a 15 per cent VAT with no exemptions, the poorest 20 per cent of Bahamian society would see a 5.74 per cent rise in prices, with the richest 20 per cent suffering a 6.57 per cent rise as measured by the Consumer Price Index (CPI).

Yet under a 10 per cent VAT with minimal exemptions, the difference in inflation spread narrows to 6.8 per cent for the bottom 20 per cent and 6.84 per cent for the top.

“In the case of the Bahamas, our modelling suggests that, in the near-term, the impact of limiting exemptions will disproportionately affect lower income households,” Oxford Economics said.

Gowon Bowe, the Coalition’s co-chair, yesterday told Tribune Business: “There’s trade-offs to be made. The best way to make those trade-offs is to have analysis and the sources of data in front of you.”

Emphasising that this was the only way sound policy changes could be made, Mr Bowe said the Bahamas had to adopt an approach of “utilitarianism” where the selected tax/fiscal reform option did “the greater good for the greatest amount of people”.

“That should be the Government’s greater objective,” he told Tribune Business. “There’s not going to be one answer that every sector and every business is going to be pleased with, but you can strive for consensus where most people are satisfied that the best choice has been made. Not all will be in favour.”

Tourism and hotel executives declined to comment on the Oxford Economics report findings yesterday, but the study suggested that visitor arrivals growth would be highest under a 6 per cent payroll tax.

“For the hotels and restaurants sector, the most important driver of activity is tourism spending,” the report found. “Over the forecast horizon, we estimate that gross value-added (GVA) would grow around 0.9 percentage points per year faster [with a 6 per cent payroll tax] compared to the baseline case [15 per cent VAT].”

The Oxford Economics study also attempted to estimate the specific inflationary impacts that the various tax reform options will have on the tourism industry, given that this was “crucial to determining the competitiveness of the tourism sector and hence the level of overnight visitor arrivals”.

The report said “the initial shock” to tourism prices was “materially higher” under a 15 per cent VAT as compared to a lower 10 per cent rate.

“This is due to a larger impact on the price of recreational and cultural services and restaurant services, both of which are consumed relatively intensely by tourists,” Oxford Economics said.

“Therefore, one message from our analysis is that the planned [VAT] exemption structure would disproportionately affect the competitiveness of the tourism sector, at least in the short-term.”

Yet the study acknowledged that a payroll tax would be “an additional cost of labour for businesses” and provide an incentive “to substitute capital for labour”.

It added: “Firms are modelled to gradually shift the incidence of the tax back towards employees..... represented by real wage growth lagging behind labour productivity growth.”

Focusing on specific sectors, the Oxford Economics study said short-term growth in the construction industry was strongest under a payroll tax in the short-term as this would help drive “more robust investment”.

But the difference in construction industry growth rates between different tax options would moderate over the long-term, with the payroll tax acting as a burden on hiring.

As for the wholesale and retail industries, the Oxford Economics report said growth in this sector would be over 3 per cent annually - and “significantly faster” - under either a 7.5 per cent VAT or 6 per cent payroll tax.

This compared to 1.9 per cent annual growth under a 15 per cent VAT but, once again, the differences between the reform options when it came to industry growth rates narrowed over the long-term.

“Scenarios involving the introduction of a payroll tax are characterised by slower private consumption growth but a stronger net trade position, with lower inflation helping to boost the long-term competitiveness of the tourism sector,” Oxford Economics said.

It added that spending reductions by the Government would also boost private sector growth by ‘crowding in’, freeing up resources for Bahamian business.