The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A leading businessman believes there “is no question” that income tax is the most equitable fiscal reform option, but the Bahamas has run out of time to implement it.

Franklyn Wilson, the Sunshine Homes chairman, told Tribune Business that “at a philosophical level” an income tax would be the solution to deliver the fairest outcome for all Bahamians.

But, given the nation’s dire fiscal position, he said the Government had effectively run out of time to consider an income tax, given that it would “take 10 years or more” to prepare the public for it.

Implementing a Bahamian income tax would be a massive undertaking, as it would require a massive cultural shift among the public, private sector and government. And Mr Wilson acknowledged that it would need “a different type of bureaucracy” to enforce and administer what would be a far more complex tax than the current system.

The Arawak Homes chairman noted that only one political figure, Marco City MP Gregory Moss, had taken a public stand against VAT on a policy principle. And he added that commercial bank heads also appeared to be calling for an income tax.

“There is no dispute that Mr Moss is right; income tax is a more equitable form of taxation than VAT and all the others,” Mr Wilson told Tribune Business. “But we have a long history of public policy as to why it is anything but income tax.”

He recalled a group he was part of in the 1960s, featuring current Prime Minister Perry Christie and minister of national security, Dr Bernard Nottage, which favoured an income tax but the rest of the Bahamas was “nowhere near that” position.

“Philosophically, there have been many persons there 40 years ago,” Mr Wilson said. “There is no question that at a philosophical level, an income tax is the most equitable form of taxation.”

Yet, indicating that the Government would likely face a huge challenge in selling income tax to the Bahamian people as its preferred option, Mr Wilson said tax policy was one of the most critical areas to obtain public buy-in.

“Tax policy always has to be progressive,” he added. “If anything has to be progressive, it’s tax policy. The key advantage of Customs duties has been that it has always been relatively easy to collect at the border.

“All these other taxes; Business Licence fees, VAT and income tax require a different type of bureaucracy and are more difficult to administer. If one is talking at a philosophical level, income tax is it, but the country can only go so far.

“Yes, VAT has its handicaps, but the Government can only go at a certain speed, and can’t do these things without regard to timing and circumstance.”

With a $5.567 billion total national debt, and a current fiscal deficit of $462 million, the Bahamas does not have enough time to sell the ‘income tax option’ before it faces another downgrade of its sovereign credit rating.

The Government’s US consultants, Compass Lexecon, assessed an income tax as one of the alternatives to Value-Added Tax (VAT) in their May 27, 2014, report to the Christie administration.

While agreeing that an income tax was “attractive” because it focused on people’s ability to pay, the consultants highlighted enforcement complexity and the ability of high income earners to evade it as major risks.

Income taxes, the Compass Lexecon report said, were levied on wages, interest and profit earned by individuals, and graduated so higher earners were taxed at a higher rate. It added that a tax structure where the rate was 10 per cent for the first $10,000 in income, 20 per cent on the next $20,000 and 30 per cent thereafter, would see a person earning $100,000 per annum pay $26,000 in tax.

“The relation between tax liability and the ability to pay is an attractive feature of the personal income tax,” Compass Lexecon wrote.

“On the other hand, these taxes impose a higher tax burden on those who choose to save more and consume less today, potentially reducing the savings rate to some degree. More importantly, the individual income tax would be difficult for the Bahamas to administer.”

Compass Lexecon said an income tax would require all Bahamians to file income tax returns annually, as is done in the US, with companies also providing information to the Government.

“These administrative barriers can be overcome, as has been done in the numerous countries with an income tax, but doing so is generally thought to be significantly more difficult as an administrative matter than implementing a VAT,” Compass Lexecon said.

“Even with protections in place, high income taxpayers would be able to better avoid or reduce personal income taxes than those with lower incomes because they have access to legal devices that can delay income or move it to other jurisdictions. The same devices would not be available to the same degree under a VAT.”

Mr Wilson, meanwhile, said the most positive development was the general consensus - in both the private sector and the Government - that a low rate (7.5 per cent) VAT, that was simplified and had few exemptions, was the best option available.

“Government can only go as fast as the public buy-in,” he told Tribune Business. “The private sector pretty strongly won the debate that 15 per cent was too high. The private sector deserves credit for developing consensus, and the Government deserves credit for listening.

“I think the private sector has to be very much commended for the cohesion and unity it showed, retaining professional expertise. I don’t know when the private sector last did that, but the outcome has been excellent.”