‘Too huge a tax hike’Sir William: Planned VAT increase worrisome
Former Minister of Finance Sir William Allen said while he commends the Minnis administration’s determination to approach fiscal deterioration head-on, the planned increase in value-added tax (VAT) from 7.5 percent to 12 percent on July 1 is “worrisome” and could have a “diminishing effect” on the national economy.
“In other words, it may do exactly what they don’t want to happen,” said Sir William in an interview with National Review.
“They are seeking to increase the revenue from a growing economy, and if this discourages growth in the economy, that’s not what they want. On the other hand, the debt to GDP then would worsen by the mere fact that the GDP might be hampered.
“You could reduce the debt, but if you also reduce the GDP, your debt to GDP is adversely affected. It’s not what you want it to be.”
The economy grew by 1.4 percent last year, the International Monetary Fund recently noted.
Government debt as a percentage of GDP is projected to be 57.2 percent at the end of this fiscal year, which is drawing to a close.
By 2020/2021, the government projects that it will be 52.1 percent.
It expects that by the end of June, it would have collected over $650 million in VAT, which, along with other taxes, accounts for just over 40 percent of all government revenue.
In his budget communication last week, Minister of Finance Peter Turnquest said the VAT increase should bring in new revenue of $400 million.
“As a result, after factoring in the growth of the economy and targeted gains from enhanced revenue collections, the total recurrent revenue in 2018/2019 is estimated at a level of $2,649 million, or 20.1 percent of GDP.”
But Sir William said such a “huge” increase in the cost of living might hurt the prospect for economic growth.
Last month, the Central Bank of The Bahamas released the results of its Financial Literacy Survey 2018.
When respondents were asked to reflect on the last 12 months and indicate whether their income was generally sufficient to make ends meet each month, 47 percent stated that their earnings were usually insufficient to cover their living expenses.
Sir William said, “Their objective is a debt to GDP that they don’t want to be above 50 percent. They’re now at about 57 percent.
“If, in fact, the tax rate is so huge as to have a reducing effect on economic growth, that alone would tend to increase the debt to GDP ratio because of the fact that GDP may be lower than anticipated.”
In late 2016, Free National Movement (FNM) Leader Dr. Hubert Minnis said he did not believe in raising taxes.
Raising taxes is a “lazy” approach to addressing a fiscal crisis, he indicated.
Asked whether he thinks the FNM administration is being lazy now, Sir William said, “It’s a convenient approach, and the view I had of VAT all along is that this one number does encourage you to address a tax issue by just increasing the rate.
“It’s a convenient rate, a convenient number to change to address a revenue problem. I always had that worry about VAT, that it can do that.
“It does encourage, you might say, a lazy approach. But of course one needs to get a sense, though, that it is at an appropriate level, and once you get it at an appropriate level, you wouldn’t be changing it every year, you wouldn’t be ratcheting it up every year.”
Arguably, he said, VAT is not yet at an appropriate level.
“Seven and a half percent is not an appropriate level for this value-added tax, this across-the-board tax. It could be higher than that, but to make the adjustment of 60 percent initially, that concerns me,” Sir William told National Review.
In a letter to Turnquest last Thursday – a day after the budget communication – The Bahamas Chamber of Commerce and Employers’ Confederation said it cannot support any tax proposal that is not founded on comprehensive economic analysis and has not received the chamber’s and private sector view and feedback.
It said the time frame given for the increase is “unrealistic and impractical”.
But Sir William said the minister of finance was not obligated to consult on a tax rise.
“It is not a practice of ministers of finance to consult the community on tax increases,” he said.
“That is not something which happens. On a new tax, yes, but on an increase in an existing tax, that is not a practice of ministers of finance.”
However, he said there could be merit in the argument that because this increase is so huge there should have been some consultation.
“You don’t give a signal that you’re going to increase a tax,” Sir William said.
“It doesn’t work that way. I will say, however, that this increase is a huge one, and I can see them making the case for it (consultation).”
He said the government needs to give the business community sufficient time to prepare their business apparatus for the changed tax rate.
We also asked Sir William whether he thinks the government should hold off on such a hefty increase.
He responded, “Once you’ve done it, you don’t back back; you don’t reverse it… I don’t think you [make an announcement] like this and reverse it. There’s more devil in that than there is in leaving it in place.”
Sir William agreed that the current fiscal situation is “quite concerning”, but repeated that he does not agree with the level of increase.
He noted, “The last FNM government that I was in already started work on this VAT. We acknowledged that VAT was [necessary].”
Sir William acknowledged that VAT is indeed a regressive tax.
“The poor spends more of their income on VAT,” he noted.
“It’s consumption-based. So a consumption-based tax is regressive. It’s not income-based. A poor person spends more of their income on consumption than a rich person.”
The government is eliminating VAT on breadbasket items and medicines. It is also waiving VAT on residential electricity bills at or under $100 and water bills at or under $50.
In a statement on Monday, the Free National Movement said those tax breaks along with the Over-the-Hill redevelopment plan “mean more and more people are going to be able to provide for themselves and no longer be dependent on the government to supply their most basic needs”.
We asked Sir William whether he thinks the VAT concessions (which the government says amount to $40 million) will “even out” the tax situation for the poor, who will have to pay 12 percent on everything else.
“No. It doesn’t,” Sir William responded.
“It remains a regressive tax. That’s the reality of it.”
Sir William also said introducing the additional exemptions could be problematic.
In May 2014, New Zealand VAT experts who produced a report for The Bahamas government recommended a single rate of VAT with virtually no exemptions.
They noted that very small businesses would find doing their VAT returns on a cash basis extremely quick and easy.
“The government’s original proposal had envisaged that there would be a single rate of VAT and that virtually no economic activity would be exempt from it and, despite very large numbers of submissions calling for particular products to be exempt from the tax – food, children’s clothing, doctors’ bills, school fees, books and many more – the panel recommended that the government retain a single rate with virtually no exemptions,” their report stated.
Sir William questioned why the government would introduce a new rate with exemptions.
“It is difficult to rationalize that,” he said.
“… What it does is, you immediately make the mistake I think we all knew we shouldn’t make with VAT. It should be one flat tax across the board – one – no exemption to it. Once you make exemptions to it, it becomes something else.
“It becomes difficult. It creates difficulties in its management. The idea was not to create exemptions. It was to have it easily managed.”
After learning that the government intends to increase VAT to 12 percent, some Bahamians were left wondering whether there will be an increase in the minimum wage as well.
The minimum wage was increased from $150 per week to $210 per week in mid-2015. Before that, minimum wage hadn’t increased since January 2002.
But Turnquest said there will be no increase in the minimum wage. He said this would drive up the cost of doing business and thus the cost of living.
Sir William said there’s another way to look at it, however.
“If people get more money, they spend more,” he said. “If they spend more, the economy grows. It depends on what perspective you are taking and it depends on who is making the critical decisions out there in the economy.”
The former finance minister recognized, however, that a minimum wage increase could discourage investment and could dissuade business people from making “growth decisions”.
In the new fiscal year, the government also intends to introduce a sliding scale tax scheme that could see gaming house operators lose as much as 50 percent of their revenue.
The Bahamas Gaming Operators Association (BGOA) has threatened to sue the government if it fails to engage with operators over what it called an “unconstitutional, discriminatory, irrational and inequitable” decision.
Asked whether he thought the government was discriminating against the gaming house operators, Sir William said, “I don’t think so. The gaming business is a peculiar kind of business. What the appropriate rate of taxation on that is, I don’t know and I’m not sure that there’s necessarily anything wrong with an increase on that, but that depends on the realities of their profitability, and I don’t know what that is.”
As such, he was reluctant to peg the tax increases for web shops as too high.