The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas was yesterday warned it is “dangerous” to dismiss tax reform options simply because they are perceived as “unpopular or “difficult” to implement, the head of a private sector tax advocacy group warned yesterday.

Gowon Bowe, who headed the Coalition for Responsible Taxation when VAT was introduced on New Year’s Day 2015, told Tribune Business that the critical issue on any new tax is whether it is “appropriate” and serves the Bahamas best after Michael Halkitis, minister of economic affairs, last week again ruled out implementing a personal income tax.

And he also argued that the Government has made life difficult for itself in seeking to “discredit” assertions that the elimination of VAT on unprepared foods will only save the average Bahamian household $11 per month, or $127 per year, by failing to produce any studies or empirical evidence that informed its thinking to disprove this.

Suggesting that the Davis administration had “fallen victim” to what it had accused its Minnis predecessor of, namely failing to produce the evidence to justify hiking the VAT rate from 7.5 percent to 12 percent, Mr Bowe said the debate over potential Bahamian savings from the Government’s latest bid to ease cost of living concerns is receiving significant “oxygen” because of the upcoming general election.

Describing it as a “dangerous statement” to suggest that income tax is being rejected because it is “not simple” to implement, the Fidelity Bank (Bahamas) chief executive told this newspaper: “We have to be careful dismissing what is best for the country because it’s not popular or easy to implement. The difficulty with that should not determine whether it is the most appropriate.”

Mr Bowe pointed out that the switch from Customs duties to VAT as the Government’s main tax revenue source involved a complex transition to a tax that relies on companies ‘netting off’ the difference between so-called ‘outputs’ and ‘inputs’ such that consumer are the ones that pay it. While this proved a challenge, and faced push back and resistance, The Bahamas still went ahead with implementation.

“It was in the best interests of the country to increase the tax-to-GDP percentage and ratio,” Mr Bowe said of VAT’s 2015 arrival. “When we’re talking about tax reform, it should not be whether it’s simple to do; it’s whether it’s the appropriate thing to do.”

He and others have argued that personal income tax would be a fairer and more progressive tax for The Bahamas as it would be linked directly to a taxpayer’s ability to pay, with those on higher earnings paying a greater share. It would also enable the Government to better target tax relief and other forms of social assistance to those truly in need and who require it even though The Bahamas has no history of income tax.

However, the Government’s argument for shying away from income tax has always been that it will be too costly and complex to set-up and manage. The Bahamas’ income per capita is also skewed by a relatively small number of high income earners, and the fear has always been that they will find legal loopholes to avoid income tax, thus leaving middle class and lower income Bahamians to shoulder the burden.

Thus The Bahamas has persisted with regressive, consumption-based taxes that require lower income Bahamian families to pay proportionally more of their earnings to the Government in taxes. And emotions surrounding VAT were triggered again this week by suggestions that the savings from slashing the 5 percent levy on unprepared foods to zero will generate minuscule savings for Bahamians.

“I think that this is the underlying issue in that the statement that was made in terms of the action being taken did not get accompanied by the empirical evidence,” Mr Bowe told Tribune Business yesterday. “They [the Government] may disagree with persons pontificating about how much will be saved, or not saved, but they are not in a position to discredit those who are criticising or to show the actually made a decision based on the information they had in their possession.”

Whether or not the $11 figure, which was derived by dividing the $15m in VAT revenue that the Government is foregoing as a result of the unprepared food elimination by the 118,221 Bahamas-based households recorded in the 2022 census, is accurate it is clear that this latest relief represents modest food news and is hardly a ‘game changer’ in efforts to ease cost of living pressures.

Mr Bowe, meanwhile, contrasted the lack of evidence to justify the Government’s latest VAT ‘zero rating’ move with the studies commissioned by both the last Christie administration and the private sector prior to VAT’s introduction. They generated “fairly significant agreement” on the inflation impact from the new tax.

“While the Government took the position with respect to this VAT cut that it was necessary to reduce the cost of living, the question really begs itself about whether this was appropriately studied,” the Fidelity Bank (Bahamas) chief said. He added that the impact on Bahamian economic output, or gross domestic product (GDP), should have been analysed as well as whether consumer spending would continue to flow or be flat.

Other key indicators that should have been assessed were the number of households that needed the extra relief provided by the VAT cut, and those that did not, which Mr Bowe said the Government could have accessed from social services data and record. The third and final key variable, he added, is the likely impact on inflation for “if inflation coming out of the US is the same as the VAT reduction people will be in the same position”.

Mr Bowe continued: “This one leaves itself open to criticism in the absence of empirical evidence, and if there was no empirical analysis performed then the Government has a lot of explaining to do over how it came to this conclusion that this is going to be a net benefit to households.”