VAT model not given credit for recession avoid

As of Friday, April 7, 2017

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ Value-Added Tax (VAT) model has not been given enough credit for preventing any “recessionary impact” when it was implemented, the Chamber of Commerce’s president said yesterday.

Gowon Bowe told Tribune Business that while VAT’s introduction inevitably affected business sales and GDP growth rates, it did not push the Bahamian economy into recession as many had predicted.

Distinguishing between slower growth and negative growth, Mr Bowe said an IMF paper describing the Bahamas as having “the most productive” and efficient VAT regime in the Caribbean had effectively “endorsed” the ‘low rate, broad base’ model urged by the private sector.

The Christie administration had initially proposed a 15 per cent VAT rate with multiple exemptions, but a concerted campaign by the Chamber’s Coalition for Responsible Taxation (CRT) and other business organisations forced it to reconsider this approach.

Suggesting that the International Monetary Fund (IMF) paper had recognised the Bahamian private sector’s “common sense approach” to VAT and tax reform, Mr Bowe told Tribune Business: “That certainly is a confirmation of the confidence we had in the recommendations we made.

“It [the IMF paper] is a positive endorsement. I believe that ultimately we can feel proud we have an efficient system in the sense we took a common sense approach that most tax systems don’t take.

“While it was intended to increase revenues, how do you make it as least onerous as possible? The way to do that was with the least exemptions.”

Mr Bowe said the Bahamas’ 7.5 per cent VAT rate, with minimal zero-rated or exempt products and services, had made the tax relatively simple for both the Government and the 6,700 registrants responsible for collecting and remitting the tax on a quarterly or monthly basis.

While increasing the Government’s net revenues by $756 million over its first two years, Mr Bowe said VAT’s introduction had not created a new cadre of Bahamian professionals - tax advisers.

Pointing to the US, where a tax advisory industry has grown up alongside a taxation system becoming ever-more complex, the Chamber chairman said Bahamian businesses - in contrast - did not need “high powered attorneys or accountants” to help them understand and administer VAT.

Mr Bowe said Bahamian accountants instead have to play a “value-added” role, helping registrants to improve efficiency in administering it, and assisting them in dealing with disputes over VAT rulings.

“I believe we’ve received positive marks from the observers; not just the IMF but the rating agencies,” he told Tribune Business.

“The one element that was not promoted enough was it [VAT] came in without a recessionary effect. I’m not saying it hasn’t slowed growth; all taxes do, but it didn’t put us in a tailspin as some of the procrastinators were saying.

“It’s now embedded in the system to the extent it’s an afterthought, as most people have adjusted their spending, and it did not result in an ‘off the cliff’ effect on sales and growth.”

An IMF ‘working paper’ on tax administration reforms in the Caribbean found the Bahamas has the most productive VAT regime in the Caribbean, holding out the ‘low rate, broad base’ structure as a model for the entire region.

The paper’s author, Stephane Schlotterbeck, also found that the Bahamas’ VAT productivity/efficiency even exceeded the average across OECD member states, plus European and Asian nations.

Measuring ‘productivity’ as the ratio of actual VAT revenues collected to potential collection if all domestic consumption was taxed at the same rate, the paper found that the Caribbean average was “slightly below” international standards.

“It ranges from 0.36 in St. Lucia to 0.79 in the Bahamas, with an average of 0.54 in the region compared to 0.55 in OECD countries, 0.59 in Europe, and 0.64 in Asia and Pacific,” Mr Schlotterbeck wrote.

“A low productivity ratio indicates erosion of the tax base, exemptions, excessive zero-rating, concessional rates, evasion, and weak enforcement.”

The IMF paper also set out a ‘road map’ for the Bahamas on what not to do with its VAT regime, detailing many of the challenges the Government and Department of Inland Revenue will likely face, and how this nation can learn from the experience of other Caribbean nations.

Mr Bowe told Tribune Business: “We’ve known the greatest challenge was not implementation. The greatest challenge is two-fold: To control the desire to increase exemptions, and use it to increase revenue, meaning increasing the VAT rates accompanied by a decrease in inefficient taxes.”

Explaining the latter point, Mr Bowe said that while the Bahamas could use efficient taxes, such as VAT, “to rid ourselves of inefficient taxes”, this should not be done simply via a ‘revenue grab’ from increasing the 7.5 per cent rate.

An increased VAT rate, he added, could result in reduced productivity and economic growth and, as a result, less revenues being collected by the Government.

“We should look at keeping the rate as low as possible to allow the base to expand as quickly as possible, thereby allowing revenues to grow by volume, not by price,” Mr Bowe told Tribune Business. “It [VAT] has to be used as a lever for activity in the economy.”

Well_mudda_take_sic 7 years ago

Bowe and others like him suffer from myopia when it comes to basic economics. Unchecked government spending slows the velocity of money in an economy, especially an economy where monetary policy is subject to an exchange control regime and national debt has reached critical levels. Add to that slowing the slowing effect of a VAT regime and you have a recipe for fiscal disaster. The IMF knows all about this but nevertheless has been insisting countries throughout the Caribbean impose this form of taxation on the citizenry after helping their irresponsible governments take on enormous amounts of unsustainable external (foreign) debt! Bowe and the other idiots like him fail to appreciate why the IMF pushes regressive rather than progressive tax regimes on economies like ours that the IMF itself has already made fragile. The IMF does it to create instability as a part of the fulfillment of their greater mandate explained in more detail in my separate posting below. Please wake up Mr. Bowe!

Well_mudda_take_sic 7 years ago

Re-post: The IMF is strongly encouraging our government to increase the VAT rate from 7.50% to the originally proposed 15%. What most Bahamians fail to realize is that the IMF is a U.S. government controlled agency charged with the mandate of effectively bankrupting third world countries so that U.S. corporate interests can acquire their natural resources, utility enterprises and prime real estate, etc., for pennies on the dollar. If the government of the third world country refuses to co-operate with the IMF after being bankrupted (as was the case when the Venezuelan government under Chavez refused to turn over the bulk of the profits from its oil fields to U.S. corporate interests like Exxon Mobile and Chevron), the heavy arm of the U.S. government teaches the third world country a horrible lesson by shutting it down and relegating it to failed statehood. The average Venezuelan has lost 28 pounds over the past 18 months due to serious food shortages and has seen their currency debased to worthlessness. As for tooth paste, washing soap and detergent, electricity, toilet paper, etc.....these are now all luxuries well beyond the reach of the average Venezuelan. As for the Bahamas, our time is drawing near because our governments are much too stupid to realize what the end game is all about when it comes to taking on unsustainable levels of external (foreign) debt and taxing the private sector out of business.

Reality_Check 7 years ago

Unfortunately what you say here seems to be true even though the IMF has for years casually dismissed such revelations as unwarranted conspiracy theories raised by quacks. But neither the IMF nor Mr. Bowe can point to a single country that the IMF has actually helped rather than destroyed!

The_Oracle 7 years ago

The "appeasement" approach is showing...... Well Mudda take sic is right. We kicked the VAT tax implementation down the road from 2008 to 2015, finally yielding to increasing pressure to implement by the IMF. But duty rates have until 2015 to be reduced to 8-10%, to WTO standard rates. I believe real property tax will happen by 2018. income etc by 2020. Kicking and screaming into the 21st century with stone age management!

John 7 years ago

"Kissinger: “Control oil and you control nations; control food and you control the people.” US strategy deliberately destroyed family farming in the US and abroad and led to 95% of all grain reserves in the world being under the control of six multinational agribusiness corporations

This was a strategy Kissinger implemented from the 1970's to take over the energy and food supplies of nations. In fact he went even further to say when you control a country's food, you also control the health of that nation. Depending on what you put in the food supply and what you take out of it. And here in the Bahamas, like many islands in the Caribbean, the farms have disappeared in favor of imported produce and the country's health issues have escalated. Not surprising marijuana is now being smuggled from the United States and obviously its effects are different from the traditional weed that came from Jamaica and Mexico. It makes young people angry and violent and many go out of their heads. Marijuana use to mellow a smoker out, give him the munchies, and put him to sleep. But yes, that aside, the Bahamas has joined the list of many countries that have become over leveraged and is now having a difficult time meeting its obligations. Not only that but it is having a difficult time finding out how to effectively put the brakes on borrowing. It is a country confused about this needs and wants and with the VAT 'succesfully' put in place, one stroke of a pen increasing the VAT rate can change the entire country's standard of living instantly. And in the case like the Bahamas is in today, where it has increased both its tax burden on Bahamians and increased the amount of tax revenues the government has taken in, but still increasing the national debt instead of decreasing it, the country is definitely on dangerous ground. But many people do not realize that the US federal reserve is also privately owned. Just like the many central banks around the world, Cuba and Iran were the last two to be taken over, the US Federal Reserve is owned by a small group of bankers, who at whim can manipulate the entire world economy.

Porcupine 7 years ago

John,

Great points. Do you read Paul Craig Roberts? If not, first read his bio. Then read some of his many articles.

John 7 years ago

After the general elections, a sensible government should put a self imposed restriction on borrowing: NO BORROWING IN THE FIRST YEAR AND AT LEAST $1 BILLION IS PAID ON THE NATIONAL DEBT. Years 2,3 and 4, Government will only be allowed to borrow half of what it pays on the national debt. So assuming they continue to make $1 billion payments, By the end of year 4, the national debt will be reduced by $2.5 billion (payments less that it re-borrowed) and in year 5, being an election year government will be allowed to borrow an amount equal to what it pays down, say $1 billion, which it really will not need to borrow because of the cash it will have available that it freed up that was servicing the $2.5 billion it knocked of the debt. And if the government continues with this fiscal policy for two consecutive terms, even if parties change, it will have effectively knocked $5 billion off the national debt, rather than adding $10, billion to it in 10 years.. Can you imagine that? But wait, it is better than that. By reducing the debt by $5 billion in two terms, it will also have effectively freed up $270 million a year that was being used to service the debt (based on 5% interest) rather than tying up an additional 1/4 billion to service a debt that would now be in a range beyond $15 BILLION!

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