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Insight: Stop Taxing The Poorest

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Attorney Fred Smith QC

By FREDERICK SMITH, QC

ALREADY drowning in a sea of hefty utility bills, high living costs, and archaic business-stifling restrictions, low to middle income Bahamians have just been smacked in the face with a sledgehammer in the form of a regressive, unexpected and misguided tax hike. It is far worse for Grand Bahamians where the economy remains mired in a quagmire of depression.

In raising value-added tax (VAT) from 7.5 to 12 percent without spending the last 12 months exploring tax reform in The Bahamas, without consultation, the FNM continues to conduct business as usual. VAT is a pass-on tax to the ultimate consumer and is an unimaginative addiction that hurts those who can least afford to pay it.

It’s time to face reality. To realistically save The Bahamas from the PLP’s fiscal negligence and the disempowering consequences of centralised governance. In order to provide a higher standard and quality of life to all Bahamians, the FNM must tax the affluent, both Bahamian and foreign. It must also stop the irrational Anchor Project Heads of Agreement tax giveaways. It must decentralise governance and empower “home rule” in the Family Islands by passing a true Local Government Act to impose taxes, pass local bye laws, and enforce. It must amend the law to provide for local government to collect real property taxes regularly and efficiently from all property owners.

Instead it has branded itself as a party oblivious to the basic realities of life in The Bahamas; an enemy of transparency and public consultation; and – most worryingly – totally lacking in both original ideas and the intestinal fortitude to attempt bold change.

Despite promising the dawn of a new day, “more of the same” has become the FNM’s mantra in the face of economic difficulties, especially in Freeport. Presumably, at least some in Cabinet know it is madness to expect different results from repetitive behaviour; but this knowledge seems to have no effect whatsoever on their policy considerations.

The government, of course, argues that it has no choice. Its predecessors left the country on the brink of fiscal disaster and yet another monumental tax hike is the “only way” to pull the country back from the brink. Such thinking betrays a shocking lack of strategic capability and either an arrogant unwillingness or a woeful inability to plan long term.

Yes, previous governments spent irresponsibly. Yes, near-sighted politicians shamelessly drove up debt to the point that our international credibility and borrowing ability were torn to shreds.

Yes, our economy continues to underperform and public services are woefully underfunded while virtually every government department, from the police to the schools to the hospitals, suffers from chronic shortages and deficiencies. Yes, our system of raising funds, which relies almost totally on import duties and VAT, has not been able to keep pace with the needs of a growing Bahamas.

Yet not for a second does any of this indicate that the right approach is to apply more of the same myopic, uninspired thinking that got us into an economic quick-sand in the first place.

The fact is, the taxation path trodden by successive governments has produced a revenue starved, economically controlled, opportunity barren society and a growing gap between, on the one hand, the wealthy and entitled elite and on the other, struggling regular Bahamians who can hope for little more than a menial job at the latest mega-development Anchor Project.

The toxic mix of customs duty and VAT depresses economic activity by discouraging people from spending money. To suggest that Freeport is “tax free” is now an ironic joke. This decreases the earnings of local businesses and ultimately, lowers the amount of tax that can be collected. That is to say nothing of the hundreds of millions of dollars routinely lost through customs fraud and VAT scams each year.

Worst of all, the ever-increasing shortfall created by this vicious cycle is inevitably foisted upon the less affluent members of society. VAT is a particularly regressive form of tax, meaning it essentially keeps poor people poor and ensures the rich will continue to become richer. In a nutshell, what the government has just done is to double down on a system that doles out massive unfairness and misery to all regular Bahamians.

Instead, why not take this opportunity to break out of the endless death spiral? Why not consider a radical and far-reaching overhaul of our entire tax system? With every person and business already tagged with an NIB number, a National Income Tax (NIT) can easily be implemented almost overnight. Persons earning below a certain income would pay no NIT, and those with higher incomes would pay a percentage, but in order not to depress entrepreneurship, those falling in the highest bracket would pay no more than $100,000 in tax per annum. Why not try to create real opportunity and prosperity for Bahamians?

To hear Cabinet ministers speak, one would think the only choice is between either more VAT on the one hand, or national annihilation on the other. Of course this is nowhere near the truth. Alternatives, in fact, abound.

For example, the most significant drain on our revenue by far are the extremely generous secret “gifts” offered to foreign investors in the form of customs duty exemptions, casino tax exemptions, stamp duty exemptions, business licence exemptions, free crown land, etc.

These could be done away with in a flash with the introduction of a corporate tax that would raise revenue from all large and successful companies that have a presence in The Bahamas.

“But that would bring an end to foreign investment!” timid politicians will lament. This is highly unlikely to say the least. What’s more, even were it so, it remains not at all clear that the practice of trading concessions for FDI investment was ever worth it in the first place. In a recent report, the Economic Commission for Latin America and the Caribbean (ECLAC ) urged Caribbean countries to reconsider the usefulness of the incentives used to attract FDI, because “on average, the repatriation of profits derived from foreign direct investment is equivalent to more than three-quarters of the FDI inflows into the Caribbean.”

In other words, foreign investors take far more cash out of Caribbean countries than they ever put in. Every foreign investor, developer, hotel and corporation operating here is taxed on their Bahamas income in their home country, while getting a free ride here. So their profits are generally 100 percent repatriated abroad, and perversely the citizens in those countries get the benefit of earning in The Bahamas.

A far more controversial suggestion is that The Bahamas introduce some level of income tax. But the fact is, such a tax would be a far better fit for the modern Bahamas, both in terms of raising government revenue and alleviating the financial burden on the average citizen.

This is a point that the FNM’s own MP, Frederick McAlpine, raised during the budget debate. Noting that this overnight 60 percent VAT hike will disproportionately affect the poor, he accused the government of being “highly disrespectful” to the public in its failure to consult, and suggested the implementation of an income tax instead.

Thank goodness at least one FNM isn’t stumbling around in the dark, lurching from quick fix to quick fix. Thank goodness at least one is determined to get us off this hamster wheel to nowhere.

With income tax, it is far more difficult to commit fraud as a taxpayer, or theft as a tax collector. Salary and employment information for the vast majority of the population is already (NIB) or could be through NIT or business licenses returns already available to the government meaning any shortfalls or inconsistencies can be quickly pinpointed and dealt with.

Because income tax spreads the burden more evenly across all of the employed population, the government would be able to raise much more revenue. Even if there is 15 percent unemployment, 85 percent of the public would still be regularly paying taxes.

No longer would we have to rely on the whims of consumers – who may spend more or less depending on a host of personal, social and environmental factors – to fund our public services.

With government raising more revenue on an increasingly consistent and transparent basis and from a greater number of taxpayers, the burden on the regular taxpayer would inevitably be less over time.

It would also give us a vehicle for collecting from foreign investors by way of bilateral tax exchange treaties, which oblige them to pay us tax on their earnings here, then claim exemptions in their home country, rather than the other way around.

Without question, income tax can and should be applied as a progressive tax; that is, a tax the rate of which increases as the taxable amount increases. Under such a system, the more you earn, the more you pay, but subject to a maximum dollar amount. This, along with efficient collection of property taxes, is probably the only hope we have of shrinking the rich/poor divide.

It is also probably one of the main reasons why it has not been implemented thus far. Under such a tax regime, affluent members of society would bear a greater and more equitable burden of taxation – because they have so much more opportunity to earn, they have much more of an obligation to pay.

The political, social and economic oligarchy – both white and black – has been quite happy to maintain the status quo; no wonder, as it is they who benefit the most. The same goes for politicians, who regularly and conveniently fail to disclose their income and assets. Income tax would force greater transparency and bring in penalties for keeping sources of income secret.

Income tax will not work on its own. There must be other strategic changes, for example the abolition of exchange control, which would facilitate the expansion of Bahamian companies into overseas markets and allow all of us to increase our capital by investing in international companies, and by allowing Bahamians to invest directly in foreign enterprises that invest in The Bahamas.

The government would have to remove much of the red tape that chokes emerging businesses, and give financial support to new local enterprises or Bahamian-foreign partnerships that show potential in burgeoning, cutting edge industries such as: ecotourism; renewable energies and alternative fuels; information technology and software development; robotics and artificial intelligence; data services and public sector technology as well as the tourist and second home industry.

Within such a framework of progressive economic change, which seeks to empower Bahamian entrepreneurship and unleash our people’s full potential, the introduction of income tax – or, more pointedly, the bringing to an end to our reliance on regressive and stifling consumption taxes – could both spur economic activity and alleviate much of the government’s revenue woes.

This, in turn, would increase international confidence in The Bahamas and help us maintain a solid economic reputation. The huge increase in revenue would also mean that struggling families could benefit from a real economic boost, as those who earn less than a certain annual income, say $30,000, could be exempted from paying any taxes whatsoever.

At the same time, the government would be creating lucrative work for local accountants, auditors and tax collectors, while funding new regulatory agencies and hiring IT professionals to digitise the system. This would amount to a whole new industry for the skilled and intelligent Bahamians whom it is said we lose to the notorious “brain-drain” through lack of opportunity.

Why then, do we continue to sputter from crisis to crisis instead of pursuing real change? For how long will we continue to apply the same threadbare bandages to our ever growing and festering fiscal and economic wounds?

How many more futile tax hikes, black-listings and credit rating downgrades must we suffer, how large does the divide between the rich and privileged and everyone else need to become before our government will engage in a rational, deliberate and fully informed discussion with the nation about the future of our tax regime, rather than arrogantly shoving their will down our throats, yet again?

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