The Tribune

• Govt moves for new study on ‘rates and types’

• But ‘irresponsible’ not to tackle public sector size

• Bahamas ‘must walk and chew gum at same time’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government was yesterday warned not to permit its latest tax reform initiative evolve into a pure “money grab” that simply finances unrestrained public sector expansion.

Both Robert Myers and Gowon Bowe, who each headed the private sector’s Coalition for Responsible Taxation in the lead-up to VAT’s 2015 implementation, told Tribune Business that the reform focus should be much wider after a Cabinet minister confirmed another study on taxes has been set in motion.

Mr Myers, who now heads the Organisation for Responsible Governance (ORG), warned that it would be “irresponsible” not to consider what he described as The Bahamas’ core problem - an ever-growing size of government that is outstripping the ability of the private sector and taxpayers to support it.

Suggesting that The Bahamas will “have to learn to walk and chew gum at the same time”, Mr Bowe said efforts to halt growth in total government expenditure - which is projected to hit the $3bn mark this fiscal year and exceed it within three - will have to be done in “parallel” to any tax reform.

He argued this would ensure the latter initiative does not become “a money grab” by the government, a term that was also used by Mr Myers, with Mr Bowe revealing he “understands calls to right the ship”.

Both men spoke out after Kwasi Thompson, minister of state for finance, disclosed in his Senate mid-year budget contribution that the government had late last year begun the process of initiating further tax reform studies amid concerns the present system is not suitable to cope with “the past two years of economic trauma”.

Describing tax reform as being among the “most controversial and the most difficult” issues to tackle, Mr Thompson cited a 2020 study by the Organisation for Economic Co-Operation and Development (OECD) that showed The Bahamas’ tax revenues are the lowest in the English-speaking Caribbean when compared to the economy’s size.

At 17.6 percent of gross domestic product (GDP), The Bahamas’ tax revenues were shown to be lower than those of St Lucia, Trinidad & Tobago and Jamaica, which stood at 20 percent, 24.2 percent and 27.8 percent respectively.

Some observers might argue this shows The Bahamas’ tax revenues are too low when measured against the economy’s size, and that the OECD study shows there is significant scope to increase them. Mr Thompson, though, gave no indication that the Government is thinking in this direction, although he argued that the findings showed efficiency in tax administration is key.

“With such a relatively low taxation system there is no doubt we must effectively manage every dollar we collect, and we must collect every dollar that is owed. It also means we must achieve greater revenue sufficiency to protect the country from severe economic shocks and ensure fiscal resilience,” he told the Senate.

“We will not make rash, politically expedient decisions when it comes to taxes and government revenue,” Mr Thompson pledged. A new assessment of our current tax policies and administration is required. Since late last year, the Government has been in discussions with our multilateral partners to conduct an updated review and assessment of our tax regime.”

The “multilateral partners” were not identified, but the minister was likely referring to the likes of the Inter-American Development Bank (IDB), International Monetary Fund (IMF) and the latter’s regional affiliate, CARTAC.

Affirming that the Government has been paving the way for another taxation study in the wake of both COVID-19 and Hurricane Dorian, Mr Thompson added: “While we have conducted studies in the past, they are time sensitive and must be grounded in present and anticipated future realities. The past two years of economic trauma require a reimagining of the future.

“A new assessment is critical now more than ever before. Such a study will not only aid in reviewing flaws and weaknesses in the administration of our tax system, but it will also review our tax rates, policies and types of tax. At the conclusion of this exercise the public will be engaged on the way forward.”

Tax reform, and whether the current consumption-based system is fit for purpose, has become a much-debated topic in recent weeks as the political parties prepare for their respective general election campaigns.

Philip Davis, the Opposition leader, ignited it when he suggested a PLP administration would initiate research to determine if The Bahamas’ current tax structure remains viable and appropriate following the devastation inflicted by COVID-19 and Hurricane Dorian.

What Mr Thompson announced yesterday appears to mirror what Mr Davis has in mind, and the PLP followed this up by pledging to cut the VAT rate to 10 percent - from the present 12 percent - if elected to office for what would effectively be a one-year experiment to see if it stimulated the economy while producing no appreciable decrease in government revenues.

The Bahamas’ VAT and import duty-dependent tax system is widely viewed as regressive, because it is not linked to a taxpayer’s ability to pay and lower income citizens spend proportionately more of their income on taxes compared to their wealthier counterparts.

The perceived need for greater equity and fairness, as well as international pressures on the financial services industry, have prompted growing calls in recent years for The Bahamas to at least look closely at implementing a personal and/or corporate income tax as well as other more progressive levies.

Mr Myers yesterday voiced concern over Mr Thompson’s remark that suggested the Bahamian public will only have input into the reform process once the study is completed. Calling on the Government to “learn from the mistakes” of its predecessors, he warned: “It’s not prudent to ram things down the public’s throat.

“Why should you not engage the public in the study? There would be better buy-in. If you have the private sector, civil society and individual industries involved from the get-go you’ll avoid any unnecessary shocks. Don’t treat the public like they’re not part of the process.”

Mr Myers reiterated his belief that “the core problem” for The Bahamas’ strained public finances is the ever-increasing size of government as a proportion of GDP (the economy’s size), as the lack of growth in the latter over the past decade has made it increasingly difficult for taxpayers to support the public sector.

Total government spending (the combined recurrent and capital expenditure) is projected to remain at around $3bn over the next four years, and Mr Myers said a “narrow focus” to any reform efforts that fails to encompass a “broad discussion” on this issue “will not be well received”.

Suggesting that the Government would “be treading on thin ice” if it concentrates solely on tax reform, he added: “If you are going to have an educated and responsible discussion on tax reform, it has to include public sector reform. Any other discussion is around something completely unacceptable.

“How can you have a discussion around tax reform when the core problem is the size and cost of government relative to our economy? It’s just irresponsible; anything less is irresponsible. Yes, there are intrinsic problems with the tax types, but the core problem is the size of government relative to the economy.

“If you’re going to ignore that you do not have the public’s interest at heart; you only have the public sector’s interests at heart. That is going to cause a collapse.”

The last Christie administration came under fire for using the extra VAT revenues to increase the size of government, rather than narrow/eliminate the annual fiscal deficit and pay down the national debt, instead adding $2.4bn to the latter.

Mr Myers warned that leaving any tax reform study to the Government and public sector to complete, before the private sector and public are brought in, was akin to “the fox guarding the hen house” given the failure to rein in expenditure over the past two decades.

“A tax reform discussion that happens without public sector reform being a significant part of the discussion is just a farce, and another attempt at a public sector money grab to pay for their irresponsible actions,” he told Tribune Business.

Mr Bowe, for his part, warned the Government against trying to reinvent the wheel by pointing to the numerous taxation studies carried out in recent years. In particular, he pointed to Deloitte & Touche report from 2018 that examined many of the issues raised by Mr Thompson in his Senate address yesterday.

Cautioning against “studies for the sake of studies” that turn into “a never-ending promise”, the Fidelity Bank (Bahamas) chief also voiced concern about “mixed messages we need to clarify”.

In particular, he pointed to Mr Thompson’s recent assertions that the Government has ruled out implementing an income tax, questioning whether this meant the subject will be off-limits in any reform study.

“Politicians have said in the public arena there will be no income tax, but now you’re saying you will do a tax study,” Mr Bowe said. “We have to be careful about mixed messaging. If you are saying no income tax, are you tying one hand behind the back of the multilateral agencies? You have to let empirical evidence guide your path.”

Reaffirming his believe that equity (ability to pay); economic competitiveness; and providing the Government with sufficient revenues were the three principles that should underpin tax policy, Mr Bowe said any reform discussion needed to be “elevated” above the political fray as election season approaches.

As to the calls for public spending reform to accompany the tax variety, he added: “I understand the calls to right the ship, but we’re going to have to do it in mid-flight. It’s not going to be possible to do this, do that. It’s going to have to be done in parallel. Our call should be for a parallel run, not just a money grab....

“My view is we have to learn to walk and chew gum at the same time. If you look at a private sector company running a deficit, you cannot focus on one side of the ledger only.”