The Tribune

By LARRY SMITH

THE problem with the government’s inept handling of the value-added tax initiative is that no-one really wants to advocate higher taxes – even if you are a partisan warrior.

There are, of course, exceptions to this rule, but probably not enough of them to make a big difference in the face of overwhelming opposition to what is a complex and costly proposal.

One of those exceptions is Arawak Homes chief Frankie Wilson. As a captain of industry himself, he doesn’t come at this issue from a “soak the rich” standpoint. Rather, he argues that all Bahamians must collectively suffer “pain” in order to rescue the government’s finances.

Although he didn’t explicitly say so, that logic is based on the fact that we have all contributed in one way or another to the mess we are in – by evading taxes, by demanding benefits, by voting for unrealistic political platforms, by conceding to outrageous union demands, by providing jobs for the boys, by tolerating education failures, by being unproductive, and on and on.

But a new tax system is a pretty radical move for the Bahamas, which prides itself on a glorious inertia. So the process would have been much easier if the government had – from the very beginning – substantively addressed the inability to collect existing taxes, implemented a transparent programme of spending curbs, and published the economic analyses it obviously has access to.

Official spokesmen will say that this is in fact what the government has done, but where is the hard evidence?

Perhaps if the public sector had sat down with the private sector at the outset to determine the dimensions of the crisis and the possible responses to it, we would not be going through this bout of hysteria now.

Perhaps if the government had published the draft legislation, regulations and tariff schedule early in the day, people would not be as confused and angry as they are now.

The poor communication of these issues is clearly demonstrated by the fact that the trade unions have yet to digest the message that we are facing a financial crisis. And while the business sector grudgingly acknowledges the need for more government revenue, most would prefer some other form of tax.

Much of the alarm in this regard is being sounded by shopkeepers, who fear that local goods will be effectively priced out of the market when compared to Florida, causing the loss of many jobs.

The big picture to all this is that the government collects about 18 per cent of our gross domestic product in revenue and spends about 21 per cent. And in the early 1990s, revenue was even less – about 16 per cent of GDP. This has led to widening fiscal deficits that are covered by more and more government borrowing.

The total output of our economy is pegged at about $8 billion, and we have already racked up almost $5 billion in public debt. Experts say the country must close a revenue gap of $500 million annually – some $200 million of which will come from value-added tax.

However, tax reform was not an issue in the 2012 election campaign (or any other campaign), although both PLP and FNM administrations had been preparing for it over the years with the encouragement of international agencies like the IMF and the IDB.

Probably the only consensus that exists on this subject is that the pending implementation date (next July) is unrealistic in terms of all the known unknowns, not to mention the unknown unknowns.

Yet we know that considerable study has been invested in the government’s proposal – from 2002 at least. That’s why so many are asking why such dramatic changes should be forced down our throats without consultation and with so little time to adjust. This lack of transparency by the political class is astounding when we consider how pressing this complex tax reform proposal is supposed to be.

Consider this recent comment from the website formerly known as FredMitchellUncensored: “If you were to look at the social media sites, the newspapers and listen to talk radio, it would seem that the government has lost the argument on VAT and its implementation. The opponents are getting more and more hysterical and it is sounding like the other campaigns which led to defeat of the PLP. We again say this is not a matter for any further debate or explanation. This is a matter to be implemented without debate or discussion. The more it is debated and discussed the farther down the slippery slope of defeat we go.”

There is, of course, another side to the revenue coin, and that is spending. It is true that the Bahamas is a relatively low-tax jurisdiction, and there is certainly a case for more government revenue and a modernised tax system. But simply talking about tighter spending controls is not enough to offset allegations of large-scale fiscal irresponsibility.

For example, ZNS – the public corporation that I had direct experience with under the previous administration – made serious efforts to reduce its multi-million-dollar annual subvention, culminating in the severance of some 80 employees in 2010 at substantial cost to the government.

This brought the corporation’s manpower closer to what external consultants (under both PLP and FNM administrations) had long considered to be realistic. Yet the present administration has rehired for political reasons many of those who left – a case of double dipping if ever there was one.

And ZNS in its present form is one of the least essential government services. There is absolutely no need for the government to be operating a subsidised commercial broadcaster in today’s Bahamas.

Bahamasair was cobbled together by the government from a couple of small private airlines back in 1973 and has consumed hundreds of millions in public subsidies over the years. You would be hard-pressed to find anyone today who thinks the government needs to run a domestic airline, yet we continue to throw millions in public funds at an operation that could easily be handled by Bahamian entrepreneurs.

So if there is no restraint here, what confidence can we have that responsible spending curbs will be put in place in other areas? Again, where is the evidence of the government’s commitment to fiscal restraint? Asking college students to pay higher parking fees?

Opposition to VAT ranges from the libertarian Nassau Institute, which opposes all taxation other than what is needed to enforce personal security and property rights; to business leaders like Super Value chief Rupert Roberts, who prefers the alternative of a simple sales tax; to financial commentators like Richard Coulson, who has suggested consideration of an income tax, to Tax Coalition lobbyists who are proposing a phased implementation over two or three years.

FNM leader Dr Hubert Minnis weighed in on this issue for the first time recently, after taking the political temperature. He argued that VAT would significantly raise the cost of living in an already weak economy, and said a new tax would be unnecessary if the government would only collect the hundreds of millions of dollars owed in existing taxes.

But Minnis’ credibility on this issue is affected by the fact that both PLP and FNM administrations have been preparing for tax reform for years, as former junior finance minister Zhivago Laing has confirmed.

The reason for such preparation is two-fold. First, experts say the country needs revenue of at least 20 per cent of GDP to cover administration, and insufficient tax revenues have led to growing deficits which will ultimately impact our economic stability.

Second, import duties must be reduced to comply with our pending membership in the World Trade Organisation. And if the revenue base is not broadened to include services we will have a real problem funding government going forward no matter what we do about WTO.

In the late 1980s and early 1990s, Barbados, Guyana, Jamaica, and Trinidad were all wrestling with similar economic problems. Guyana was forced to seek external debt relief and went through great pain. Barbados had to make big spending cuts, control wages, and diversify its economy. Trinidad combined income restraint with currency devaluations. And Jamaica embarked on rapid trade and financial liberalisation followed by tight monetary management.

All four countries divested state assets and used the returns to finance public sector operations and reduce debt. And tax regimes were streamlined by the consolidation of indirect taxes into a value-added or consumption tax.

An IMF-supervised structural adjustment programme here would be politically unpalatable to say the least, and tough on everyone. Elements of such a programme could include devaluation of the Bahamian dollar, significant public sector cuts and economy-wide wage restraint in return for emergency financing.

This is why we need more, rather than less, debate on this issue.

• What do you think? Send comments to larry@tribunemedia.net or visit www.

bahamapundit.com.