The Tribune

By Roderick A. Simms II,

Advocate for sustainable Family Island growth and development

RASII@ME.com

The Bahamian government’s move to increase value-added tax (VAT) last year will have an adverse impact on southern Family Islands and, by extension, all Out Islands. Therefore, the government should consider making these islands economic “tax-free zones”. While the 4.5 percentage point increase will impact consumers across all islands, the brunt will be felt by those living in the southern Family Islands - particularly those that have yet to fully recover from major hurricanes that severely impacted them between 2015 to 2017.

Consider this

The price of goods and services is higher on Family Islands for a number of reasons, one being the extra transportation costs. Therefore, goods being shipped and sold to Family Island business owners are still subject to price increases despite the reduction or elimination of duty on certain items. An increase in taxes will not improve this situation. The nature of VAT encompasses the theory of horizontal equitym where all consumers pay the same amount of taxes despite variances in income. But given the need for the country to achieve economic growth, is it a wise idea to apply the same level of taxation to those in the southern islands? The economies of these islands were already worse off compared to those in the north and central Bahamas. With the hike in VAT, can the economies of these islands survive, or will residents be forced into domestic migration? The southern islands of The Bahamas include Acklins and Crooked Island, Inagua and Mayaguana, all of which are yet to be properly developed despite their potential in agriculture, marine tourism, real estate and eco-tourism.

A measure of taxes

There is often talk that the government’s move to raise taxes is a hindrance to the development of the country. This is not entirely true. There is some good and bad in taxation. The key is timing, and the type of tax being implemented.

Taxes help to provide services to the citizens. In the case of The Bahamas, these include national insurance; social welfare subsidies; the maintenance of prisons; the police force; a defense force; a public education system; and a public health care system. Certain taxes are put in place to help maintain such services, as well as help the government achieve its goal of reducing the fiscal deficit.

The Bahamas’ tax structure is unique based on the government’s need to service 14 inhabited islands that are home to local and foreign residents with different incomes. The government would like to capture revenue from every consumer living in or visiting The Bahamas. It does not consider, on a case-by-case basis, which constituency or island should receive more or less revenue. However, residents in the southern islands do not always have access to, or the same quality of, public benefits compared to the capital, Nassau, and other Family Islands. Yet they contribute the same percentage of VAT.

If the government were to single out, for example, residents in a particular area known for higher unemployment and propose that VAT remain only at 7.5 percent, then the revenue forfeited would have to be found elsewhere. With no economic growth, and opportunities for such arising at a stagnant pace, the next best thing to do would be to borrow these funds. It is fair to say that the weighted average of the population in the southern islands compared to the entire Bahamas would be minimal. Therefore, the removal of taxes from these areas would not be burdensome to the government because VAT is equally distributed across those islands where economic activity is better and the population size is larger.

Opportunities

If the government were to propose today that all taxes were to be lifted for the southern islands, would this change the thinking of potential local and international investors? Would there be an influx of investors attempting to bring their businesses to these islands? Perhaps taxation is not the only issue. If the government were to eliminate all red tape related to doing business, eliminate tariffs and other taxes, and provide a small and medium-sized enterprises (SME) fund for local investors on these islands, will these islands see an increase inactivity and entrepreneur interest?

To develop these “tax free zones”, the government and Bahamian entrepreneurs must learn to work hand-in-hand. Governments must allow entrepreneurs and investors access to capital and easy processes within economies that are better off, such as New Providence, Abaco and Bimini. Then, perhaps, investors would see the need to expand their businesses or start up new companies on these islands if they are allowed room to successfully grow their companies.

A Position on Taxes

Taxation has been a bone of contention among residents of different countries. In The Bahamas, taxes are always an interesting topic of debate because you have those that simply do not want to pay taxes, and then there are those who opine that their tax dollars are not being put to good use. In a developing country, governments face tremendous pressure from global disruptions, local capital restrictions and bureaucratic legislation. The Bahamas is no different.

However, governments must know when and where not to make certain decisions. For instance, the Bahamian government’s recent decision to increase VAT was partly done in an effort to help pay unfunded arrears and eliminate the fiscal deficit. But an increase to 12 percent also comes at a time when unemployment remains high, and there has been little to no economic growth in the past four years. The profit margin of industries such as tourism/financial services continues to shrink as these markets are becoming more saturated, leaving less room for a competitive advantage to be obtained.

Conclusion

The southern islands, along with other Family Islands, are not as developed as New Providence, Grand Bahama, Bimini or Abaco, and therefore do not deserve to be taxed the same way. The government should alleviate residents on these islands of VAT so that businesses can grow and investors are incentivised to do business. While these islands are part of The Bahamas, their circumstances differ and the economic realities are much different. There should be serious consideration of this by the government.