The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has no ‘perfect’ tax reform option that will achieve all its economic objectives, a study for the Tax Coalition has concluded, warning that change will inevitably create “winners and losers”.

The long-awaited Oxford Economics dynamic economic modelling, released yesterday, highlighted the need for government spending cuts and minimal tax exemptions if the Bahamas was to maximise its planned deficit and national debt reductions.

The report effectively backed the need for the Bahamas to implement fiscal reform via a ‘package’ of tax/revenue and spending measures.

And it suggested that this country would have to make policy “trade offs”, as different taxes (and different rates) were found to be more appropriate for different industries.

The study warned that reforms would have “alternative implications for consumers and producers, small versus large corporations, poor and rich households, and different sectors of the economy”.

Gowon Bowe, the Coalition for Responsible Taxation’s co-chair, agreed with Tribune Business that the message coming from the Oxford Economics study was that neither Value-Added Tax (VAT), nor a payroll tax, was a ‘panacea’ for all the Bahamas’ fiscal and economic woes in and of itself.

“The two major themes I saw coming through was that expenditure reductions or expenditure cuts allow the Government to keep the tax burden on the populace at the lowest level,” Mr Bowe told Tribune Business.

“You see it with VAT at 7.5 per cent, and both the payroll taxes. It requires expenditure cuts to keep them viable.”

The study was extremely blunt on this issue, saying: “Private sector growth will be boosted by a strategy that includes expenditure as well as purely revenue-raising measures.”

Oxford Economics said that to maximise Bahamian gross domestic product (GDP) growth in the long run, “VAT with a narrow range of exemptions would represent the best option”, but it acknowledged that this was only “marginally” better than alternative tax reform options.

Mr Bowe added that he especially hoped the Government would “take note” of the study’s findings that VAT at a rate lower than the initially-proposed 15 per cent would not have the desired fiscal impact if it maintained the current extensive exemptions list.

“If you lower the rate from 15 per cent, you can’t have all those exemptions. The 10 per cent with multiple exemptions, that’s the once conclusion that Oxford draws out; that it does not achieve the fiscal tightening,” Mr Bowe told Tribune Business. “That’s the biggest thing they ought to take note of.”

While acknowledging that the results produced by its study were largely “ambiguous”, Oxford Economics’ study added: “One key policy conclusion from our analysis is that the introduction of VAT with a headline rate of 10 per cent and the current planned set of exemptions would be inadequate” to set “government debt as a percentage of GDP on a sustained downward path”.

Mr Bowe said this was a “clear indication that if you want to lower the rate, you have to accompany it with very strong expenditure controls.

“There’s a very clear trend from this report that if we can get expenditure under control, that will have the most significant impact on fiscal reform.”

This was highlighted at the top of Oxford Economics’ results summary, which said that apart from its baseline model - the Government’s initial 15 per cent VAT with multiple exemptions and $60 million in webshop gaming revenues - all scenarios had the necessary fiscal affect.

“All reform strategies achieve a substantial fiscal tightening, with combined expenditure and revenue-raising measures generating a comparable improvement in the Bahamas’s fiscal position,” the report said.

“In our baseline case, the introduction of VAT at 15 per cent helps the Government to run a sustained primary surplus in the long-term, a feature which is broadly replicated across other scenarios.

“Such a fiscal consolidation helps to steadily reduce the burden of debt interest payments over time, ensuring a more efficient allocation of government resources. In the baseline case, debt interest payments fall to 8 per cent of total spending in 2024 compared to 11.5 per cent in 2013.”

The other scenarios assessed by Oxford were:

• 10 per cent VAT with the same multiple exemptions as the baseline example
• 7.5 per cent VAT, with the same rate levied on the hotel and tourism industry, rather than 10 per cent.

Government consumption is reduced by 10 per cent between 2015 and 2018, with the cuts split between procurement and wages. Some 50 per cent of the wage cuts come from headcount reductions, the remainder from “slower wage growth”.

• A payroll tax of 6 per cent, split equally between employers and employees. 
“Imperfect compliance” assumes effective rates are 2.5 per cent for both.

Hotel room occupancy tax remains at 10 per cent, with effective real property tax rates reduced due to greater compliance. Government consumption is reduced permanently by 25 per cent.

• A payroll tax of 12 per cent, split between employer and employee, with effective compliance rates of 4.5 per cent for both sides.

Government consumption is reduced permanently by 12 per cent.

Highlighting the differences between the various scenarios, Oxford Economics said its findings indicated that while a VAT tax would slow the economy more than a payroll tax in the short-term, the difference between the two was much smaller in the long-run.

“Our modelling indicates that short-term growth would be more materially affected by the introduction of VAT compared to a payroll tax,” Oxford Economics said.

“On average, real GDP growth is over half a percentage point a year higher during 2015-16 in [payroll tax scenarios] compared to the baseline case. “

The study added, though, that all the scenarios showed a “broadly similar impact on the supply side capacity of the economy in the long-run”.

And VAT at 10 per cent and 7.5 per cent were shown to generate the highest level of long-run GDP growth at 0.5 per cent above the 15 per cent case.

But Oxford Economics warned that “the implications are more material” when it came to VAT and short-term inflation.

Essentially backing studies performed by the Government and Inter-American Development Bank (IDB), its study said: “There are more material differences between the scenarios in terms of their impact on consumer price index (CPI) inflation.

“The introduction of VAT causes an initial surge in inflation to over 6.5 per cent in 2015, in both the baseline case and [10 per cent VAT]. Although, the level of the CPI broadly converges across scenarios involving VAT, it remains permanently lower” under both payroll tax options.