By NEIL HARTNELL
Tribune Business Editor
The 2020-2021 budget represents a missed opportunity to kickstart talks on progressive reforms such as personal and corporate income taxes, a University of The Bahamas (UoB) economics lecturer is arguing.
Rupert Pinder told Tribune Business that The Bahamas needed to move away from its regressive consumption-based taxation structure, centred on VAT and import tariffs, given that it disproportionately impacts poorer Bahamians by consuming more of their income than higher earners.
Suggesting that COVID-19 had created an ideal opening to initiate reform discussions that was not taken up by the budget, Mr Pinder said there was some scope to increase tax revenues once the economy recovers given that they have traditionally fallen below the 20 percent of gross domestic product (GDP) threshold recommended as a minimum by international agencies such as the International Monetary Fund (IMF).
However, he quickly pointed out that increased revenues could be generated by broadening the tax base rather than increasing rates. The UoB lecturer pointed to Barbados as one example of this, noting that it had responded to the European Union’s (EU) demands to end so-called “ring fencing” by extending corporate income tax beyond just its domestic economy to the offshore sector as well.
By increasing the number of entities subjected to this tax, Mr Pinder said Barbados created a “win-win proposition” for its domestic economy as the broader base enabled it to lower the rates for businesses in this area without any drop in total revenues.
Several Bahamian private sector sources have privately suggested to Tribune Business that this nation needs to follow Barbados’ example and increase taxation on its international business sector, with some even going so far as to suggest that corporate income taxes need to be considered as the present structure is not working.
Mr Pinder, meanwhile, acknowledging that COVID-19’s economic devastation meant tax reforms will have little near-term impact, added that he was unable to see The Bahamas escaping the need to introduce new and/or increased taxes to combat its growing deficit and debt burden once the pandemic’s worst effects are over.
KP Turnquest, deputy prime minister, told this newspaper earlier this week that it was “too early” to talk about the need for such revenue-enhancing measures as he placed his faith in The Bahamas’ ability to grow its way out of its fiscal woes. However, unless this nation finds explosive GDP expansion from somewhere - something it has failed to do for two decades - it is hard to see the government avoiding Mr Pinder’s prediction.
“In my view, in the medium term, I don’t see how we can get around looking for additional taxes,” he told Tribune Business. “I personally don’t see anyway around it. The only thing I’m hoping for is that in our search for additional taxes we start putting some of these direct forms of taxation alternatives on the table as opposed to these consumption-based taxes.
“If we were to do a survey of persons at the low end of the spectrum they would argue they are probably over-taxed. In the absence of empirical data some would probably dismiss that, but there may be some truth to it, as those at the higher level of income are arguably under-taxed.”
The Government’s tax system is heavily skewed towards consumption, or cost of living, taxes such as VAT, import tariffs and Excise Tax. These are all deemed “regressive” taxes because they are not linked to a person’s ability to pay, and lower income Bahamians pay a greater portion of their earnings than their wealthier counterparts as a result.
Income tax was rejected as a reform option/alternative to VAT when the latter was introduced in 2015 because it was seen as too costly and administratively difficult to administer, resulting in reduced income for the Public Treasury and opening up avoidance/evasion possibilities. And, with a population of just 400,000 and a 235,000-strong workforce, there were also questions over whether there was a broad enough base to ensure an income tax financed all the Government’s needs.
However, Mr Pinder and others are arguing that income taxes - both personal and corporate - would be more progressive, and generate greater fairness and equity in Bahamian society, given that wealthier persons and companies would pay more than lower income counterparts.
“One of the things I had expected in the Budget is that it would have spoken in very bold terms on reforms and also in terms of recovery,” the University of The Bahamas lecturer said. “Maybe some would argue there are elements of recovery in the Budget, but I was hoping it would speak to bold recovery and reforms.
“In my view this Budget was a normal-type Budget. In other words, it was as if the economy was humming along. What I saw was a Budget that focused on the now and for the next 12 months. I would liked to have seen a Budget that spoke to a minimum of at least three years out.
“Bearing in mind you’re dealing with politicians who think in terms of an election cycle, I would have loved to have seen a Budget look to recovery for the next three years, and sets out a series of progressive steps to take us there over the next three years.”
Acknowledging that The Bahamas’ national debt, which is projected to break through the $10bn mark in the 2021-2022 fiscal year is “quite worrisome”, Mr Pinder said this needed to be addressed via a multi-year plan rather than in one Budget.
“I would also loved to have seen a discussion with respect to a strategy of at least putting in place a framework where you’re setting up a committee to look at this whole issue of tax reform,” he told Tribune Business.
“When you look at it, our tax revenues as a proportion of gross domestic product (GDP) are at 18-19 percent. The international agencies have been saying for years, particularly for developing countries, that tax revenues as a percentage of GDP should be in the 20-30 percent range.
“If you take the mid-point of that range, 25 percent, there’s some room for tax reform. The counter argument is your trying to get blood out of a stone. It’s not much use getting the money now due to the downturn in the economic activity, as you don’t have that buoyancy and the tax base has narrowed,” Mr Pinder continued.
“But we have to look at how we get additional revenues, and need to have that discussion on more progressive taxation. Even with this COVID-19 it’s something that has to be looked at in the next three to five years. I wanted to see more discussion in terms of reform.”
Many individual businesses and Bahamians, trying to rebound from the damage inflicted by the pandemic and associated lockdown, are likely to be extremely wary - if not outright hostile - of any reform suggestions leading to new and/or increased taxes.
They would want their tax burden to remain neutral, meaning there is no increase in what they pay to the Public Treasury. One reform option that might be acceptable is replacing the Business Licence fee, which causes multiple distortions through being levied on gross revenues, with a corporate income tax on profits.