VAT ‘Gaps’ Spark Public Resistance

First Published: 2013-12-18

Published in The Tribune December 18, 2013 and posted here with the kind permission of the author.

At last we have it: the Government’s recently published “Summary and Explanation of the Draft Legislation” is a solid, workmanlike summary of the proposed VAT regime. Of course it does not answer every question or satisfy every interested party, but at least it has the virtue of laying out clearly the points to be argued. These include:

The  domestic airline industry can question why it should be subject to VAT while land and water transportation will be exempt – a key point for private companies serving the Family Islands in competition with subsidized BahamasAir.

While exemptions from electricity charges will be granted to low-use  residential consumers, hotels and commercial users can complain about VAT added to their ruinously high power bills, until, at some speculative future date,  BEC may (possibly) be reorganized to reduce its cost structure.

Restaurants outside hotels will object to adding 15% VAT to their diners’ checks while hotel restaurants will only add 10%.

The real estate industry has queried  why  certain rental businesses will be subject to a $50,000 sales threshold rather than the standard $100,000.

And of course nothing, not even a rough estimate, is given as to the salary and administrative costs  of the new Central Revenue Administration (CRA) and its Commissioner; presumably most of the staff will be expensive new hires and not simply departmental transferees.

All the above issues can  be resolved    and clarified before VAT becomes law and is imposed, at whatever final level is decreed.

Unfortunately, the Summary and Explanation, useful as it is, tells the Bahamian public nothing about the essential underlying  objective “to return the public finances to a sustainable and prudent state”, (page 2). VAT or any other type of taxation represents only part of the entire budgetary process, relating to revenues; it says nothing about expenditures.

What Bahamians want to see, before they give any blessing to VAT, is for the Christie administration to give a clear and detailed explanation of how the ever rising category of current expenditures will be attacked, plus steps to improve efficiency and encourage investment. The Coalition for Tax reform is already working on specific proposals.

Mr. Christie and his minions at the Ministry of Finance have gone to great lengths to write and publicize the Summary. But it gives no hint that Government is actually focusing on reducing expenditure – quite the opposite. The preamble on page 4 simply states that “Government must have access to revenues  that adequately fund both current and future needs of its citizens”. In other words, the State will continue to encourage and pay for these needs, with no suggestion of a policy that would analyze the “needs” and find  that they are simply self-serving preferences of a society that has learned to depend on Government hand-outs.

Even worse, the Summary tells us on page 13 that as a result of VAT’s impact on the cost of living, the poor will be hit hard and “Government would boost targeted spending on social assistance to low income households”. This requirement is confirmed in the recent detailed VAT analysis by the IDB. In other words, long before VAT kicks in with its presumed beneficial effects a few years down the road, the  very first result will burden the Government with a new, and unquantified, subsidy on top of the many that it is already paying.

Government has taken great pains to prepare the VAT Summary and Explanation as well as the  draft legislation and regulations, and is holding educational meetings for a spectrum of future taxpayers. It should take equal pains to explain in detail how it proposes to carve away at the expense budget and take steps to improve the investment climate of The Bahamas. It was good to read a recent release from Minister Halkitis saying that expenditures declined during the latest quarter, but that is a long way from presenting a wide-ranging budget tightening program.

To date Bahamians have never seen any “White Paper” giving official responses to questions that are uppermost in their mind:

– What efforts, if any, are being made to reduce at least some portion of the outstanding $540 million of taxes due and unpaid? Are there insuperable obstacles to enforcing collection? Surely some projections of estimated repayment of this huge receivable can be made.
– After many years of paying an indefensible  annual subsidy, recently some $20 million, to keep BahamasAir flying under State ownership, are  there any current proposals  that would result  in getting the company off the Government’s books? If negotiated wisely, the country’s privately owned airlines could gradually take over all BahamasAir’s operations, leaving Government to assume its indebtedness, to be repaid over number of years. Sure, there would probably be a modest reduction in staffing, but adequate severance payments would cost less than continuing the subsidy. All that is  needed is political will, a decision to overcome the long-standing  objections to the bogy of “privatization”.
– The same question applies with even greater strength to Bahamas Broadcasting Corporation.  How can the Prime Minister possible defend money-losing ownership of a venture that is nothing but a propaganda machine for Government? Yes, we need a national TV and radio station competing with Cable Bahamas, but we have any number of experienced private executives and staffers in this field who would jump at the opportunity to take over BBC’s operating license, running it professionally as an independent, news,  entertainment and culture source, on professional lines that would drop incompetent political hacks and hackettes. Again, severance payments would be the order of the day, replacing continuing subsidies.
– The IDB recent country report and other studies have continually zeroed in on deficiencies in our land registry system and clumsy bureaucracy  that slows up the granting of construction permits, two factors that put a serious brake on new investments projects, whether domestic or foreign-source. Why has Government not made a formal response to these points? New investment  has a indirect, but quickly felt, impact on the national accounts, bringing higher employment and tax revenue  and lower need for social services paid by the State exchequer.
– Why does Government continually resist any suggestion that it try to reduce public employment, or any admission that there might be over-staffing or under-performance that could justify a careful weeding out of staff? The official policy seemed to be locked into a view that it is somehow “un-Bahamian” to reduce the public payroll by giving out some pink slips.

A policy of staff reduction is common in our private sector when economic circumstances require; why should the State be exempt from the normal rules  that govern the effectiveness of any organization? Redundancies need not be executed in a heartless manner for employees who have become accustomed to life-long tenure at the public trough. Severance arrangements can be negotiated, which will in the long run cost less than continued retention of unneeded slots and under-performing time-servers.

If Government were to produce a White Paper addressing the above points, a “Deficit Reduction Program” of equal weight to its existing efforts on behalf of VAT, Bahamian businesses and the general public would be better educated why there may be a need for additional tax revenue. At the moment, public opinion is left in the dark about how Government  could save money , and, in the barn-yard phrase, is asked to buy “a pig in a poke” in accepting VAT.

In fact, a Deficit Reduction Program (DFR), If carried out with vigor and determination, might demonstrate that no new taxes are needed, even after customs duties are reduced to permit our entry into the World Trade Organization (WTO). An interim solution to fund  immediate revenue short-fall may be to introduce VAT next  July at a lower than the announced  15% – say, 7.5% – giving time for a DFR to be executed and for alternative revenue measures to be considered. This columnist has often argued (and is now finding  many supporters) that some form of income tax is preferable since it is more equitable than regressive consumption taxes like VAT and could be put in place, as in Panama, without endangering  our position as an offshore financial center.

In short, the Bahamian public has good reason to resist its elected representatives from rushing into VAT in its present form  – as Perry Christie, a consummate politician, doubtless recognizes.

Mr. Coulson has had a long career in law, investment banking and private banking in New York, London, and Nassau, and now serves as director of several financial concerns and as a corporate financial consultant.

E-Mail Mr. Coulson.

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