“New Directions in Bahamian Economic Policy”

First Published: 2010-06-26

In these taxing times the inevitable unpleasant fall-out from the 2010 Budget is a time to review a tax expert’s remarks on Taxation in The Bahamas in 1997.

In that year Dr. Alvin Rabushka made the following statement when referring to a government report:

“The report focused on "recurrent" revenue and expenditure and paid virtually no attention to capital expenditure, which has been a major source in the rising public debt. Down playing capital expenditure presents a more optimistic view of the public finances than is justified by looking at the total picture. The underlying notion is that borrowing to finance capital expenditures can be repaid from the earnings of capital investment. Unfortunately, governments rarely set prices at levels that are sufficient to cover current operating costs, much less an allowance for the cost of capital, and The Bahamas is no exception in this regard. And much of what is labeled capital investment is, in fact, consumption.”  (Emphasis added)

“Eat Dessert First, Life is Uncertain” – as fiscal policy may explain why the Public Treasury needs an additional $100 million tax dollars to “bail it out”.

Dr. Rabushka describes the NIB as follows:

…”the  payroll tax has been abused. Under the goal of establishing a public pension scheme, the payroll tax has facilitated a massive buildup in public debt, which has been spent largely on government consumption. The payroll tax amounts to Bahamians robbing themselves tomorrow to finance current consumption–eating one’s cake and planning to have it, too”.

As of June 1st 2010 the payroll tax has been increased to 8.9% of wages – a 1% increase in cake consumption.

What can we expect to see on the dining table in ten years? (Forget dessert)

There are suggestions for tax reform for a small country wishing to maintain “tax haven” status. The banking sector comprises about 1/3rd   of GDP and thereby a critical portion of the economy.

In the halcyon days of 1997 Dr. Rabushka explained to Rotarians why Exchange Controls would be around for a long time. In 2010 the likelihood of free exchange of the B$ with the $US is as remote as ever – unless a miracle strikes and the debt is significantly reduced.

The seeds for intelligent discussion were planted in the speech to Rotary, and they are still there. Perhaps a tea party on the steps of parliament is called for, no cake served – just plain tea.

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