The Tribune

• Agrees enforcement alone won’t hit revenue, deficit targets

• Believes income tax supported once other levies removed

• Governance reformer: IMF clearly sees ‘revenue weakness’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A SENIOR banker has backed the International Monetary Fund’s (IMF) scepticism over the Government’s stance that it will hit its deficit and revenue targets solely through better compliance and enforcement.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that while increased enforcement would produce an initial “flurry of collection” activity these gains were likely to “taper off” and be non-recurring with such efforts ultimately becoming “tiresome”.

“The truth of the matter is that... if we don’t have some kind of reform we’re not going to hit the objective of 25 percent revenue-to-GDP,” he argued. “While we can continue to hold to increased collection efforts and increased enforcement to get us there, there’s a reason those taxes have performed so poorly in the past.

“While there will be a flurry of collection and enforcement efforts it will taper off because if it’s an inefficient system it will not be easy to achieve. If you have to use tremendous efforts on enforcement it becomes tiresome.” Tax compliance and enforcement typically produces one-off gains from out- standing amounts being paid-off but is not usually a sustainable revenue source year after year.

The IMF, in its recent full Article IV report on The Bahamas, asserted that this nation must introduce a personal income tax targeting “the top 10 percent of earners” and implement other reforms to hit the David administration’s 25 percent revenue-to-GDP goal and eliminate the annual fiscal deficit.

However, the Government has consistently described new and/or increased taxes as a last resort measure and a “lazy way out” when it comes to addressing the country’s fiscal woes. Simon Wilson, the Ministry of Finance’s financial secretary, earlier this week said the Davis administration believes there is sufficient “buoyancy” in the current tax system to achieve its revenue ratio ambitions.

Hubert Edwards, the Organisation for Responsible Governance’s (ORG) economic development committee head and principal of Next Level Solutions, agreed that the IMF’s Article IV report was speaking to “some weakness in the revenue streams” of the Government and how sustainable they are when it comes to meeting the administration’s fiscal targets.

“That’s one of the not clearly spoken underlying implications,” Mr Edwards added of the IMF report’s prodding for new and increased taxes. “I think it speaks to the sustainability of revenue at this point in time, and there is a question of whether or not the Fiscal Strategy Report presentation putting us at 25 percent revenue-to-GDP is going to be attained and attained sustainably over the long-term.

“The IMF seems to be of the view that there needs to be more taxes, and it listed a number of options.... They clearly have a view as to some weakness in the Government’s revenue streams. That wasn’t explicitly stated, but when you read through the information that’s in there it becomes clear that the IMF is putting a question mark over the sustainability of revenue.”

Mr Bowe, meanwhile, said that while the current regressive, consumption-based tax system “may have adequate from Independence through to the early 2000s” this nation has still run a deficit every year since 1973. And it has also had to cope with multiple hurricane-related disasters, and the fiscal and economic fall-out, including Hurricane Dorian.

He added that the multiple incentives, tax breaks and other concessions afforded the hotel industry has also much-reduced the Government’s income from that sector - likening it to a “hole in the back of the boat” where monies taken in at the front go straight out the back due to these favourable investment preferences.

Reiterating his previous calls for The Bahamas to shift to a more equitable, progressive income-tax based system, Mr Bowe suggested that many companies and individuals would willingly embrace such reforms once they understood this will not add to the number of taxes they face.

Most in the private sector, the Fidelity chief argued, will “happily do away with the Business Licence fee, high levels of Customs duties and a moderate level of VAT if we simplify the system with income tax and VAT”.

“I still think you would get resounding consensus,” Mr Bowe told Tribune Business of corporate and/or personal income tax. “It’s just that persons believe that income tax will be added on top of existing taxes, which is why there is continual resistance.”

The IMF, in its full Article IV report on The Bahamas that was released on Friday, urged this nation to exploit the G-20/OECD drive for a 15 percent minimum global corporate tax to craft and implement such a levy to suit this nation’s own needs.

And, besides imposing a personal income tax on the highest 10 percent of income earners, the IMF called for such a reform to be accompanied by a 5 percent levy on capital gains, dividends and interest income. It also suggested that the marginal personal income tax rate equal that of the corporate tax to prevent companies avoiding the latter by paying our profits as salaries to shareholders and top executives.

Combined with removing the $60,000 real property tax cap for owner-occupied residences and increasing the rates for “higher value” homes, as well as “eliminating tax expenditures” on gambling which does not attract 10 percent VAT, the Fund suggested this reform package could generate extra government revenue equal to 3.7 percent of GDP - almost $540m based on today’s figures - in four years’ time.

The Davis administration has already set a target for government revenues to equal 25 percent of GDP, or economic output, by the 2025-2026 fiscal year. However, the IMF implied that without the reform package it has outlined, The Bahamas will never achieve that goal as it unveiled projections showing this ratio would remain stubbornly just below 22 percent through 2032-2033.

And, as a result, the IMF also forecasts that the Government will fail to achieve its objective of eliminating the fiscal deficit from 2024- 2025 onwards - a year in which it currently projects a $109.2m Budget surplus. Instead, in the absence of any adjustments, it is predicting that The Bahamas will continue to run deficits - albeit declining slightly every year to less than 1 percent of GDP - through 2032-2033.

The IMF acknowledged that implementing corporate and personal income tax regimes could be a hard sell in The Bahamas, given that there is no history of such taxation and its implementation would require “significant investment” in training personnel as well as technology to administer such systems.

Should this prove “infeasible”, the IMF suggested The Bahamas raise the VAT rate to 15 percent - a 50 percent increase in percentage terms - as an alternative although it admitted such a move would deepen the regressive taxation where lower income persons give proportionally more of their income to taxes than their wealthier counterparts.

Between corporate and personal income tax, the IMF is forecasting that The Bahamas could raise extra revenue equal to a combined 3.4 percent of GDP - equivalent to just over $495m at today’s economic output. This, it predicts, will enable the Government to both beat its 25 percent revenue- to-GDP target and eliminate the fiscal deficit with a sustainable Budget surplus from 2026-2027 onwards.