0

Business Bites: The Budget Catastrophe Belongs To The Pm

photo

Richard Coulson

By RICHARD COULSON

Woe unto us! A little over a year ago we elected a new Government that would lead us into a land flowing with biblical milk and honey. Instead, we are left, like Job, to repent in dust and ashes. In its most basic function, creating the budget that controls our economy, Dr Minnis’ FNM party, with nearly 90 percent of House seats, has managed to lose the faith of its citizens.

In the recent poll by impartial Public Domain, only 20 percent of the 800-person random sample said they would vote FNM in an election held now.

Further, 73 percent of respondents opposed the VAT increase from 7.5 percent to 12 percent.

Hundreds of articulate demonstrators marched under the windows of Parliament in session, demanding repeal of the increase, bearing placards exclaiming “vision not taxes” and “keep ya’ corned beef”.

Speaking for the Institute of Chartered Accountants, Chairman Gowon Bowe stated that the abrupt 60 percent VAT increase would have the “opposite effect” on Government’s objective of increasing revenues, and compliance would suffer.

Leading food retailer Rupert Roberts insisted the increase should have been to 10 percent, dropping the Bread Basket “savings” and all the miscellaneous exemptions, whose main effect will be to clog business with new paperwork.

Several FNM back-benchers are defecting from the party line and refused to vote for the VAT increase.

Government even seems to be losing popular support for its bitter battle to tax web shops more heavily, as polls revealed 73 percent found the new scales unfair, with probable job losses adding to unemployment rolls.

For the first time, we see active non-partisan dissent spread from the angry shouts of the struggling poor right up to careful words of accountants and business leaders. I do not predict that Government is about to fall through losing a vote of confidence in the House. But in the longer term, citizens’ confidence in the FNM may erode right up to the election in 2022.

Minister of Finance Peter Turnquest has taken the brunt of public attack. But surely, on such a critical issue, the PM must have reviewed and endorsed his recommendations. And surely, Minister Turnquest’s every-last-buck policy could have been toned down by a more politically astute politician than Dr Minnis, to give us the usual national grumbling instead of today’s outright denouncement. Surely a savvy politician would have known that the average breadwinner, and his bargain-shopping wife, is outraged by the abrupt cost-of-living hike and will not be soothed by VAT- free corned beef, rice and mustard, or by cheaper shoes, clothing and tiles—or registering the family aircraft!

A shrewder PM would have avoided picking a direct fight with our gaming industry which Tourism Minister D’Aguilar now calls a “sin”, doubtless infuriating thousands of law-abiding players who are now sinners, losing an unprecedented 5 percent tax on cash wagered. Maybe the numbers boys themselves are getting rich, but it has never been explained how “fairness” justifies a sliding tax scale that is not imposed on any other Bahamian business, even the unloved Canadian banks. Any excessive drain on Family Islands’ economy could have been handled by special regulations limiting the impact of gaming on those cash-strapped communities.

Minister Turnquest was quite correct in his grand strategy of chopping away at the debt mountain left by the PLP. His tactics have been inept and may prove disastrous for his party, but he had only one major device in his tool-kit: increase VAT, a tax system which he did not create.

Income Tax should Replace VAT

Five years ago when VAT was being planned, a small group of us proposed the alternative, income tax. We recognised that a new over-all tax regime was needed to replace the multifarious tariffs, excises, fees and charges then prevailing. But we argued, without serious disagreement, that the clearly regressive nature of VAT would hit the poor harder than the middle class or the rich. The Government’s White Paper of February 2013 dismissed our views in a few paragraphs.

First, income tax would be a “disincentive to work effort and entrepreneurship”. Really? Did the graduated rates of personal income tax in the US deter Bill Gates or Jeff Bezos from starting Microsoft or Amazon from scratch and creating billion-dollar companies? Have they imposed any disincentive to entrepreneurs against creating hundreds of Silicon Valley start-ups, some succeeding, others failing? Has there been any lack of venture capital firms willing to take the risk of early investing? Repression of work effort only occurs when, as in socialist post-war Britain, the marginal top rate of income tax reaches a confiscatory 90 percent.

Second, a “heavy burden of compliance” with a new and unfamiliar system would impede any reliable collection. Until 1913, income tax was unknown in the US, and its first imposition aroused vigorous objections. In the 105 years since then, despite hundreds of actual and proposed amendments and endless wrangling over details, it has evolved into a pretty efficient way of raising about $900bn per year, plus a similar amount of social security taxes. This has been achieved with never any deep-seated evasion, through a large measure of compliance by individual tax-payers and corporate withholding agents. With the proper publicity and education, the sensible Bahamian citizenry could do the same.

The real concern of the PLP politicians who created VAT was simply fear of having to drop the long-standing catchphrase “there’s no income tax in The Bahamas”.

They relished that we were known as a “tax-haven”. Today, that phrase is more of an insult than a blessing, and no longer provides our core advertising for foreign investment

VAT has been successful simply as a revenue generator, contributing $638m this fiscal year and a projected $1.062bn next year, about 40percent of total revenue, far larger than the next component, import duties, at 17percent. When we join the World Trade Organization (WTO) in 2019, the VAT contribution will rise even higher to replace the duties we must cancel to satisfy WTO rules. VAT’s 12 percent may rise another few percentage points.

But VAT has been a failure in creating a healthier economy. After having collected over $2bn VAT revenues, even Minister Turnquest admits that “we are worse off than we were”.

Government debt has continued to rise, and the higher revenue has simply been used to pay larger state salaries and expense items that Government refuses to reduce, like the annual subsidies to BahamasAir and ZNS.

We are a nation of greater disparity between rich and poor than other Caribbean countries. A progressive income tax would narrow this disparity. It could have four brackets, of, say, 10, 20, 30, and 40 percent, marginal rates on personal income. The unemployed would pay nothing, but all others would be liable, with an exemption easing the burden for the lowest, as in the US. For the first time, lawyers, doctors, accountants, real-estate dealers, and contractors would be taxed on the net income from their professions, as would all executives and employees receiving a pay-check from Government or any company doing business here, whether locally or foreign-owned. This might come as a shock, but it happens throughout the modern world. There would be no need for the complexities and double-tax features of corporate income tax or business license fees, but any interest, dividends or capital gains would be included in income taxed at standard rates,

Compliance would not be an insuperable problem. Employees below a certain tax level would simply be subject to withholding, similar to deductions for NIB payments. Higher bracket taxpayers will be well known to the authorities and can easily prepare a tax return, much simpler than the forms known in the US. I have enough faith in Bahamians not to fear mass evasion attempts.

Virtual abolition of VAT in favour of income tax will require a few years of transition, but I believe is inevitable. Many studies show how “primitive” tax systems like The Bahamas, relying on transaction taxes such as VAT and import duties for 30-40 percent of revenues, evolve into “modern” systems like the US and the UK where transaction taxes amount to less than 2 percent and much of the balance comes from income tax.

No nation’s society will tolerate forever a tax regime heavily skewed in favour of the rich against the poor.

Comments

DDK 5 months, 4 weeks ago

Woe unto us indeed. All points raised and expressed have merit, in my humble opinion. I would add, if I may be so bold, that our entire governmental way of doing business, together with its civil service staff, needs a complete overhaul from top to bottom; a tall order I do realize, but then Rome was not built in a day!

0

Sign in to comment