The Tribune

By Frederick Smith QC

Bahamians continue to suffocate under the weight of hefty utilities bills, an unnecessarily high cost of living and daunting bureaucratic hurdles to making their own way in the world. The last thing they want to hear is the government intends to oppress them further with the burden of new taxes.

At the same time, our economy continues to underperform and public services are woefully underfunded while virtually every government department, from the police to the schools to the hospitals, suffers from chronic shortages and deficiencies. Our system of raising funds, which relies disproportionately on import duties, has not been able to keep pace with the needs of a growing Bahamas.

The fiscal path trodden by successive governments has produced a revenue starved, economically controlled, opportunity barren society and a growing gap between the wealthy and entitled elite and struggling regular Bahamians who can hope for little more than a menial job at the latest mega-development.

Clearly this cannot go on, and any realistic plan to overturn the status quo and create real opportunity and prosperity for Bahamians while supporting an efficient and responsive public sector must include a radical and far-reaching overhaul of our tax system.

Currently, the main generator of revenue for the government is a combination of customs duty, value-added tax and business licence tax, all of which are considered forms of consumption or expenditure tax. On the face of it, the attraction of this kind of taxation is that it is self regulating; how much tax you pay depends on how much you choose to spend.

Looked at it another way, however, what this means is consumption tax depresses economic activity by discouraging people from spending money. This decreases the earnings of local businesses and ultimately, lowers the amount of tax that can be collected. That is to say nothing of the hundreds of millions of dollars routinely lost through customs fraud and VAT scams each year.

Corporate tax

The most significant losses by far are the extremely generous ‘gifts’ offered to foreign investors in the form of customs duty exemptions, casino tax exemptions, stamp duty exemptions, business licence exemptions, free crown land, etc.

The first and most important change which must be made to our tax regime involves a total re-think of our relationship with the foreign entities that court our government. Routine concessions must be done away with and a corporate tax introduced that would raise revenue from all large and successful companies which have a presence in the Bahamas.

“But that would bring an end to foreign investment!” timid politicians are likely to lament. This is highly unlikely to say the least. What’s more, even were it so, it remains not at all clear that the practice of trading concessions for FDI investment was ever worth it in the first place. In a recent report, the Economic Commission for Latin America and the Caribbean (ECLAC ) urged Caribbean countries to reconsider the usefulness of the incentives used to attract FDI, because “on average, the repatriation of profits derived from Foreign Direct Investment is equivalent to more than three-quarters of the FDI inflows into the Caribbean.”

In other words, foreign investors take far more cash out of Caribbean countries than they ever put in. Every foreign investor, developer, hotel and corporation operating here is taxed on their Bahamas income in their home country, while getting a free ride here. So their profits are generally 100 percent repatriated abroad.

With such a favourable deal, it is safe to say the foreign companies will continue coming, concessions or not.

Perhaps this is why, all around the Caribbean, corporate taxes have long been in place. For example, companies incorporated in Antigua and Barbuda pay corporate income tax of of 25 percent. It is the same in Aruba, Curacao and Dominica. The Dominican Republic charges 27 percent and in Jamaica, non-resident companies can pay as much as 33 precent of their profits to the government.

Meanwhile, our proximity to the United States, US-pegged dollar and stable political atmosphere mean we will undoubtedly maintain our edge over regional rivals, whom we could undercut in any case by introducing a lower tax of 15 or 20 percent.

Income tax

A far more controversial suggestion is the Bahamas introduce some level of income tax. The fact is, however, such a tax would be a far better fit for the modern Bahamas, both in terms of raising government revenue and alleviating the financial burden on the average citizen.

First of all, with income tax, it is far more difficult to commit fraud as a taxpayer, or theft as a tax collector. Salary and employment information for the vast majority of the population would be kept on file, meaning any shortfalls or inconsistencies can be quickly pinpointed and dealt with.

Efficient, accountable, digitalised oversight would replace the murky ‘honour system’ of relying on the import declarations of consumers and the honesty of Customs officers.

Secondly, because income tax spreads the burden more evenly across all of the employed population, the government will be able to raise much more revenue.

Even if there is 15 percent unemployment, 85 percent of the public would still be regularly paying taxes.

No longer will we have to rely on the whims of consumers, who may spend more or less depending on a host of personal, social and environmental factors, to fund our public services.

With government raising more revenue on an increasingly consistent and transparent basis and from a greater number of taxpayers, the burden on the individual taxpayer would inevitably be less in the long run.

Without question, income tax can and should be applied as a progressive tax; that is, a tax the rate of which increases as the taxable amount increases.

Under such a system, the more you earn, the more you pay.

This is probably the only hope we have of shrinking the rich/poor divide.

And, any shift to corporate and income tax must be accompanied by a reduction in customs duties and a cap on VAT.

Better yet, a government with real courage would simply abolish the old tax regime, thereby freeing Bahamians from the attendant administrative duties and making it far easier to do business.

Income tax would not be difficult to implement as the new regime could simply adopt everyone’s existing National Insurance details, and the government could amend the National Insurance Act to provide for the new tax, along with social security and other potential benefits.

Part of a progressive package

There must be other strategic changes, for example the abolition of exchange control, which would facilitate the expansion of Bahamian companies into overseas markets and allow all of us to increase our capital by investing in international companies.

The government would have to remove much of the red tape that chokes emerging businesses, and give financial support to new local enterprises or Bahamian-foreign partnerships that show potential in burgeoning, cutting edge industries such as: ecotourism; renewable energies and alternative fuels; information technology and software development; robotics and artificial intelligence; data services and public sector technology.

Other steps likely to increase confidence in the jurisdiction and foster a good environment for doing business include the further development of anti-corruption legislation, appointment of an independent Director of Public Prosecutions, creation an Office of the Ombudsman, full inaction of Freedom of Information and crucially, meaningful empowerment of local government. Local councils in the Family Islands should be given the ability to independently tax and effect collections in order to fund capital and maintenance expenditure, allowing locals to self-regulate, develop their own vision for their communities and provide for infrastructure and public service needs.

Within such a framework of progressive economic change, which seeks to empower Bahamian entrepreneurship and unleash our people’s full potential, the introduction of income tax – or, more pointedly, the bringing to an end to our reliance on regressive and stifling consumption tax – can both spur economic activity and alleviate much of the government’s revenue woes.

This, in turn, will increase international confidence in the Bahamas and help us maintain a solid economic reputation.

The government could provide incentives to certain businesses or geographic areas, granting tax reductions or exemptions to spur economic activity and freeing up private sector funding for charitable causes that the public sector cannot currently fund, for example old age homes; shelters for victims of abuse; social, cultural and environmental NGOs, etc.

The huge increase in revenue would also mean that struggling families could benefit from a real economic boost, as those who earn less than a certain annual income, say $30,000, could be exempted from paying any taxes whatsoever.

At the same time, the government would be creating lucrative work for local accountants, auditors and tax collectors, while funding new regulatory agencies and hiring IT professionals to digitise the system. This would amount to a whole new industry for the skilled and intelligent Bahamians whom it is said we lose to the notorious ‘brain-drain’ through lack of opportunity.

The benefits for Freeport in particular would be immense.

Thanks to the Hawksbill Creek Agreement, the immense potential of this visionary city could finally be achieved as it would essentially become the only tax-free zone in the Bahamas, as it was always intended to be, thereby sparking huge foreign and domestic investment.

One thing is for sure, we simply cannot continue on the current course.

How many blacklistings and credit rating downgrades must we suffer, how much unemployment and economic stagnation do we have to tolerate, how large does the divide between the rich and privileged and everyone else need to become before our government will engage in a rational, deliberate and fully informed discussion with the nation about the future of our tax regime?