Business is advised to “brace” for an increase of 2% on the payroll tax (aka income tax). The tax rate in 2010 is slated to rise to 10.8%.  The wage ceiling rises from $400.00 to $600.00.

An example of the effect of the increases on a small company with three employees follows:

At the current tax rate of 8.8% on wages with the cap at $400.00 per week the tax is $5,500.00 per annum.  When the wage ceiling is raised from $400.00 to $600.00 and the tax rate increased to 10.8% the annual combined payment to NIB becomes $10,100 per annum; an 84%  increase!

Such an increase will have unintended harmful consequences.

Most Bahamian businesses have already been laying-off employees in line with falling income. The growing numbers of unemployed will join the line-up for Unemployment Insurance, the program government enacted earlier this year in a fit of unsustainable altruism.

The tax increase coupled with the Unemployment Benefits program sets in motion a vicious cycle of tax increases to support the newly unemployed whose numbers increase as a consequence of the previous tax increase.

Does this make sense? Well yes, if a welfare state is a desired end, and government expansion the means to the end.

The unemployed are non-contributors. Increasing unemployment results in a decrease in contributions to NIB. Therefore a tax increase that leads to job loss undermines the objective of the increase intended to guarantee the viability of the Fund in the future.

To increase taxes in a slowing economy takes resources from producers when they are needed most. In the best of times taxes are disincentives for economic expansion, in the worst of times they are destructive to businesses struggling to survive.

The NIB Fund as a ready source for government borrowing is a kind of candy store to indulge the government’s sweet tooth for spending. Perhaps the “ready” money explains
ridiculous amounts spent on projects like the $36,000.00 for each of 6 roundabouts for the Beauty Pageant – if the numbers reported in the press are correct.

Out of debt out of danger is an old proverb that says it all. It applies to personal debt as well as to the liabilities of business and government. The danger to the value of the Bahamian Dollar by the growing debt affects everyone and cannot be ignored. Tax rates and policies that increase costs undermine businesses the major source of income needed  to reduce the debt.

Business is advised to “brace” itself for tax increases yet government exempts itself from responsible actions that would have made a tax increase unnecessary. There is something tragically wrong with that.

THE NASSAU INSTITUTE

September 9th 2009