The Tribune

• Ex-finance minister: Cut ‘demands’ supporting data

• Cannot just be ‘thrown out’ to IMF, rating agencies

• Tax Coalition chief against across-the-board slash

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government must “give comfort” that its planned VAT rate cut will not worsen The Bahamas’ already-precarious economic and fiscal position, an ex-Cabinet minister warned yesterday.

James Smith, former minister of state for finance in the first Christie administration, told Tribune Business that the Davis administration’s plan to slash the VAT rate from 12 percent to 10 percent “demands” economic modelling and analysis before it is implemented to ensure there are no “unintended consequences”.

It is unclear whether such work has been performed despite the Prime Minister’s press secretary reaffirming on Wednesday that a Bill to give legal effect to the VAT rate cut, a key pledge in the Progressive Liberal Party’s (PLP) election campaign, will be brought to Parliament before Christmas.

Mr Smith, though, argued that “you cannot just throw it out there and wish it to happen” when it comes to something as critical as the Government’s main revenue source, which VAT has become. The performance of this tax, introduced by the second Christie administration in January 2015, has now assumed even greater importance given the depth of the fiscal hole created by COVID-19.

The former finance minister was yesterday backed by Gowon Bowe, head of the private sector’s Coalition for Responsible Taxation when VAT was introduced, who argued that “any responsible government” would not proceed with a rate cut unless it possessed empirical evidence showing there would be a “net neutral” impact on total tax revenues.

He added that the key question facing the Davis administration’s plan was whether “long-term gains” exceed VAT revenues relinquished in the short-term due to the rate cut, as further expanding the current $1bn annual fiscal deficits is not what the likes of the International Monetary Fund (IMF) and credit rating agencies are looking for.

And both men warned that the VAT rate cut as planned will benefit wealthy Bahamians, who can afford to pay, as well as those on lower incomes. While many persons and businesses will likely welcome any tax cut, given that it holds out hope of reducing cost burdens following the battering inflicted by COVID-19, Mr Bowe said he did “not welcome” the proposed slash to 10 percent.

The Fidelity Bank (Bahamas) chief added that was “prepared to pay higher taxes” given his ability to afford to do so, thus ensuring that future generations are not burdened by the debts and bills incurred in the present.

“The lowering of any tax rate ought to be considered from the point of view of what you expect to happen,” Mr Smith told this newspaper. “It demands some kind of analysis because it could have unintended effects and you have to say what you want to happen......

“Changing tax rates to achieve an objective demands at the very least some kind of analytical input to ensure you get the effect you intend. When you look at your tax system like this, you’re not only sending a signal to a local audience but to an international audience, and there are the ones that lend you the money as well as the rating agencies.

“You need to give them some comfort that this makes sense.” Suggesting that the Government’s VAT pronouncements to-date were merely “flashing it at them”, Mr Smith added of the proposed cut: “It’s always a risk but, again, it’s got to be a calculated risk. You have to persuade these guys it makes sense, and is not being done at a whim and a fancy.

“What you’re saying is we recognise the conditions of a growing deficit, shrinking revenues and sluggish major industry (tourism), and a reduction in the tax rate could help the deficit rather than hurt it for these reasons and, at the same time, you’re reducing the cost of living for the general populace. You can’t just throw it out there and wish it to happen.”

No specifics have been provided on details critical to how the proposed VAT rate cut to 10 percent will impact the Government’s revenues, economic recovery and The Bahamas’ general competitiveness. And it is unclear whether any of these impacts, and other effects, have been modelled by the Ministry of Finance since the Davis administration took office.

If they have, no such studies have been made public. The Prime Minister has suggested that the rate cut will ease the burden on Bahamian families, putting more money in consumers’ pockets and thus stimulate increased spending and consumption that increases economic activity and the volume of transactions - the latter leading to an increase, not a decrease, in VAT revenues.

It is unclear, though, whether a two percentage point cut is significant to generate the effect Mr Davis envisages especially given high levels of unemployment and under-employment due to COVID-19. Chester Cooper, deputy prime minister, while in Opposition suggested the VAT cut could increase government revenues by $200m annually although no supporting data was produced.

The now-Opposition has described the proposed VAT cut, which may only be for one year, as an ill-timed experiment that The Bahamas cannot afford given a record $10.356bn national debt that is bigger than the economy and fiscal deficits still touching the $1bn mark.

Kwasi Thompson, former minister of state for finance, initially said the PLP’s move would cost the Government some $100m in annual revenues. He later upped this loss to $162m, again without supporting data.

And, equally unknown, is whether the Davis administration plans to go back to the ‘broad-based’ VAT model which won The Bahamas praise when it was introduced. The former Minnis administration rejected this by introducing multiple VAT exemptions, which the IMF in 2016 estimated could have cost the Public Treasury up to $60m per annum.

These exemptions have introduced a level of complexity into VAT’s administration that could have opened the door for tax avoidance, evasion and fraud.  Companies are unable to recover the VAT they pay on their ‘inputs’ when products they sell are exempt, increasing their costs, while also prompting them to increase prices on non-exempt items to compensate.

Mr Davis has also suggested that enhanced revenue compliance and enforcement measures will offset the foregone VAT revenues. This will rely heavily on the Revenue Enhancement Unit, but its performance was not detailed in the latter years of the Minnis administration.

The Unit was formed by now-recalled financial secretary, Simon Wilson, in late 2016, and according to Moody’s collected $90m in its first six months. At an average of $15m a month, if it were to achieve similar levels it could act as an offset based on the $162m figure quoted by Mr Thompson. However, it is uncertain what state the unit is in after being disbanded, then reformed, by the last administration.

Meanwhile, Mr Bowe told Tribune Business: “I would certainly expect, given the fiscal circumstances we’re in, that any any responsible government would not commit to proceeding with it unless they have an equilibrium model that suggests the net impact is net neutral, at least, on the revenue intake and, hopefully, positive.

“The question is: Can we forego short-term revenues for long-term gain? We’re in circumstances where all creditors and lenders are not looking for us to grow the current deficit. While we need to grow and invest, it has to be without sacrificing revenues. We have to be very methodical, and use best available information as opposed to finger in the air.”

Mr Bowe added that an across-the-board VAT cut would benefit the wealthy as well as lower income households, something that he was against as higher income earners would benefit from a reduced tax burden “when the country cannot afford it”.

“I for one do not welcome a tax cut,” he explained. “Some will say that’s because you can afford it. That’s exactly the point. I’m prepared to pay higher taxes so my children and grandchildren will not be paying my bills later in life. I’m prepared to pay my fair share as long as the Government is prudent with its expenditure.”