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By NEIL HARTNELL
Tribune Business Editor
The Government has not ruled out implementing an income tax, the Deputy Prime Minister revealing yesterday: “We have to consider all options.”
K P Turnquest, who is also minister of finance, told Tribune Business there had been no internal discussions within the Ministry of Finance or wider government to-date on the possibility of introducing an income tax in the Bahamas.
He added, though, that the Minnis administration had “taken note” of this week’s recommendation by the International Monetary Fund (IMF) that it should consider a low-rate income tax to replace revenue that will be lost as import duty rates fall.
The Fund also suggested it would be a fairer form of taxation, and Mr Turnquest yesterday said that the Government wanted a tax system that was “progressive rather than regressive” to relieve the burden on lower income Bahamians.
“Certainly, we have to consider all options,” he said of the IMF’s income tax recommendation. “However, to-date no such discussion has been had by the Government, and we’ve not had that internal discussion in the Ministry of Finance.
“We take note of the recommendation by the IMF, and as we go forward we will be looking at adaptations that are necessary due to changes in trade patterns and international trade agreements.”
The IMF had suggested a low-rate income tax as a revenue replacement for Customs duties, which have to be reduced because of the Bahamas’ Economic Partnership Agreement (EPA) commitments and, potentially, accession to full World Trade Organisation (WTO) membership.
Customs/import duties are viewed as barriers to trade, and the EPA agreement with the European Union (EU) already obligates the Bahamas to significantly reduce or eliminate numerous tariff rates.
Mr Turnquest affirmed to Tribune Business: “We will consider all available options to ensure that, at the end of the day, we have a tax system that is simple, reflective of our unique situation in terms of openness as an economy; is progressive rather than regressive so that the burden of taxation is not borne by the most vulnerable in our country, and achieves the revenue yield necessary to provide the services Government must provide for society.”
The Bahamas’ taxation system has historically been based on consumer, or ‘cost of living’, levies such as Customs/import duties and now Value-Added Tax (VAT).
These taxes are regressive because lower income Bahamians have to pay a disproportionately higher percentage of their income in taxes when compared to those who can most afford to pay - the rich.
Both Mr Turnquest and the IMF alluded to the Bahamian taxation system’s regressive nature, the latter suggesting a low-rate income tax will be more equitable because rates would be linked to a person’s ability to pay.
“Over the medium term, introducing a low-rate income tax as import duties are further reduced should make the tax system more progressive and help protect infrastructure and social spending,” the Fund argued.
However, many in the private sector yesterday reacted angrily to the income tax suggestion, fearing it will only increase the taxation burden and slow an already-struggling Bahamian economy further (see other article on Page 1B).
It was also among the reform options assessed by the former Christie administration before it eventually plumped for VAT, with income tax ultimately rejected because the system required to administer and enforce it was seen as too expensive and complex.
Apart from the income tax suggestion there was little that was surprising in the IMF’s statement on its Article IV consultation with the Bahamas, the Fund giving an accurate summary of this nation’s economic and fiscal position.
“The IMF, like Moody’s, has accepted the Government’s fiscal plan as being reasonable, and they - like us - have to see the execution and follow through,” Mr Turnquest told Tribune Business. “That’s the story, really.”
Yet while agreeing with the Minnis administration’s fiscal consolidation targets and objectives, the Fund called for it to lay out “detailed policy measures” on how it will achieve these goals.
Mr Turnquest yesterday said he wanted to create ‘a sinking fund’ in the 2018-2019 Budget,”if I had my way”, which would be used to build-up savings for financing hurricane recovery.
He added that the Government was seeking to strike the right balance on Fiscal Responsibility legislation, and realised that it “cannot continue to kick the can down the road” on public sector pension reform.
The IMF, in a timely reminder following Hurricane Irma, urged the Government to build-in Budget savings to provide “an additional buffer against the fall-out from natural disasters due to the Bahamas’ exposure to hurricanes.
Confirming that the Government will not undertake emergency borrowing to finance Irma relief efforts, Mr Turnquest said: “Going forward we have to build into the Budget a catastrophe fund to react to these kinds of events because, at the end of the day, these shocks can have a significant effect on our spending patterns and debt.
“We want to, as much as possible, set aside some revenues and have funding available to help in the event of natural disasters. That will not happen overnight, but we do have in mind a proposal with respect to creating a ‘sinking fund’.”
Asked when this will be created, Mr Turnquest replied: “If I had my way, next Budget year, but I have to be careful making commitments this far in advance.”
With the IMF backing the Government’s planned Fiscal Responsibility legislation, the Deputy Prime Minister said the Government was seeking a balance between future administrations being able to easily amend it and having the financial flexibility to respond to hurricanes and global recessions.
“We are consulting with experts in this area,” Mr Turnquest told Tribune Business. “We certainly want to put forward a robust piece of legislation that reflects our current circumstances, but gives us the flexibility to respond to external shocks - climate change and hurricanes, and recessions.
“We want to make it as prescribed as possible so that the legislation is not easily or arbitrarily set aside.”
The IMF also identified the urgent need for public sector pension reform, which has already left the Government facing a $1.5 billion-plus liability via a ‘pay-as-you-go system’ where civil servants contribute nothing to their retirement income.
“The whole idea of public sector pensions is an open secret in terms of it being a serious issue for the country,” Mr Turnquest told Tribune Business. “We share the view that there has to be some reform in this regard.
“Specific policy decisions have not been advanced as yet. We recognise this is a can we cannot continue to kick down the road.”
Public sector pension payments are forecast to cost taxpayers $95 million in 2017-2018, up from just over $82 million in 2015-2016, and the situation will only get worse.
The KPMG accounting firm previously disclosed that these liabilities, which it currently estimates at around $1.5 billion, are set to increase to $2.5 billion by 2022, and $4.1 billion by 2032, unless essential reforms are enacted.
These liabilities would push the national debt towards $8.7 billion if included in the calculation, a figure almost equivalent to total annual Bahamian economic output or a 100 per cent debt-to-GDP ratio.