The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A more progressive income-based tax system is needed to hit the Government’s “aggressive” 25 percent revenue-to-GDP target and prevent the gap between rich and poor widening.

Gowon Bowe, a Fiscal Responsibility Council (FRC) member, speaking after it released its verdict on the 2021-2022 Budget and the Davis administration’s supplemental version, told Tribune Business he had made his views known to fellow members that The Bahamas’ current consumption-based tax system is “not the tax system of the future”.

He added that the Council’s report had hinted at this when it argued that the current VAT and import-tariff dependent system made it less easy for the Government to target tax policy at specific sectors of the population or business community that need assistance, such as low income households.

“The existing predominantly consumption-based tax system of The Bahamas limits the ability of the Government to target policies toward particular cohorts of the population, as VAT and duty exemptions are broad policy tools that are generally more costly, less equitable and less efficient than more targeted direct expenditures,” the Council said.

“During debate on the 2021-2022 Budget, the Government communicated its commissioning of a study of the tax system of The Bahamas, and various options for tax reform. Given the inherent limitations of the current consumption-based tax system to better target tax concessions, the Council recommends that the study of the current tax system be expedited and leverage past studies to facilitate early deliberations and conclusions on the most appropriate tax system for The Bahamas.

“Further, certain tax concessions accord different treatments for Bahamian nationals and foreign nationals, which presents challenges to the overall equity of the existing tax concession regime.”

Tying this to the Davis administration’s plan to increase government revenues, as a share of gross domestic product (GDP), from the present 20.2 percent to 25 percent by the time its term in office ends in 2026, Mr Bowe indicated that it was unlikely to achieve this solely through greater compliance and enforcement alone.

“When you make a statement as bold as you will achieve a 25 percent revenue-to-GDP target, did it get accompanied by what you will do to get there? It did speak to closing loopholes, but what it didn’t say so explicitly is that those loopholes have existed for many years, and you would have hoped to close them before,” he added.

“The last time we had any major rise in the percentage of revenue-to-GDP was when we introduced VAT. To give the general public a correlation, were only able to increase revenue-to-GDP when we introduced a new tax. That’s not to create a fear of a new tax, but with existing taxes it’s [25 percent revenue-to-GDP] not achievable.”

Mr Bowe, asked whether new and/or increased taxes were inevitable to hit the Davis administration’s revenue goals, said the collection of tax arrears would get the Government part-way there but were “a finite item” that would not necessarily repeat year after year.

“We’re going to have to say the consumption tax system is not the tax system of the future,” he told this newspaper, suggesting The Bahamas will have to move away from a structure where lower income earners paid disproportionately more in taxes than their wealthier counterparts.

“We’re going to have to eliminate that type of anomaly where those who have the least among us pay more relative to their income,” Mr Bowe explained. “Right now they’re paying a greater portion of their income in taxes than someone earning more, and that’s inequitable.

“That can lead to growing disharmony. The divide between the have’s and the have not’s is not as pronounced as in the likes of Haiti and Jamaica, but it is growing. We have to be careful that the tax system does not perpetuate a widening of that gap, but a closing of that gap.”

The Council, in its report, said: “The Government has set a tax revenue to nominal GDP ratio target of 25 percent over the next five years. Based on historical tax revenue to nominal GDP ratios, the target is aggressive and will require significant reforms in tax policy and tax administration in order to be realised.

“It will be equally important to ensure that the tax regime is simple, equitable and efficient...... Additionally, it has been announced that the former Revenue Enhancement Unit (REU) will be re-established, with expectations that the REU will collect tax revenues of around $200m over fiscal year 2021-2022 and fiscal year 2022-2023.

“The strengthening of enforcement of tax collections and deterring tax delinquency should positively impact tax revenues. However, greater detail regarding the strategic and operational focus of the REU, along with quantification of areas with the greatest levels of uncollected tax revenues, is required to appropriately assess the credibility of the projected tax revenue gains,” it added.

“Additionally, the effectiveness of pecuniary and non-pecuniary methods are required to be studied to facilitate the most appropriate mix of such methods to maximise tax compliance and collections..... Efforts to properly equip the tax authorities with appropriate technology will be critical for improving overall tax compliance through expanded automation for taxpayers that should improve efficiency in paying taxes.”

The Council also voiced concern that at current levels “public debt service costs account for 65.6 percent of total recurrent expenditure, which equates to $0.76 of each $1 of tax revenue received being used to finance these obligations. This demonstrates the importance of continued fiscal discipline to develop and sustain a downward trajectory of public debt”.

And it noted that it had not been given access to the financial modelling underpinning the VAT rate cut to 10 percent. “The assessment of public debt, outstanding liabilities including unfunded pension obligations, and contingent liabilities underscore the need for a consistent and comprehensive definition of public debt and the development of a framework to estimate and monitor contingent liabilities,” the Council said.