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VAT increase could be part of major tax cut

When the Christie administration brought in value-added tax (VAT) in January 1, 2015, a new era of “in-your-face taxation” began.

Prior to VAT, customs duties were the big tax source. People knew they were there causing items to be very expensive but they did not know what item carried what duty. You went to the cash register and paid. Your receipt just had a final total. There was no breakdown. People thought retailers were greedy and took too much profit through high mark-ups.

Few knew the ridiculous duties government charged that brought so much hardship.

The government’s website lists some of the duties as of July 2017, the beginning of this fiscal year. There’s 30 percent on aluminum foil; 40 percent on regular air conditioners; 60 percent on auto parts; 30 percent on bed sheets; 45 percent on plastic blinds; 20 percent on bras; 45 percent on Christmas ornaments, and on and on.

If these duty rates were tomorrow put on customer receipts people would be outraged.

We also do not have an income tax – though, there is a National Insurance payroll deduction. Bahamians do not have to account for all they make each year and give a percentage to the government.

In countries with income tax people know their rate. They know when tax day is. They dread paying.

VAT is on every bill, on every receipt. It’s a shock to a people who erroneously thought they paid little to no tax. The Christie administration brought it in at 7.5 percent. The Minnis administration is raising it to 12 percent. It has two reasons for the increase. It wants to grab revenue to close the deficit and decrease the need to borrow. It also is preparing for accession to the World Trade Organization (WTO). For this to happen the government will have to either remove or radically reduce customs duties. Tariffs are barriers to trade.

As part of its three-year plan, the Minnis administration says it will give back to the people by reducing duties. The VAT rise was in preparation for that. We hope the government will see the wisdom in getting rid of nearly all duties for retailers. This would transform The Bahamas for the better.

Customs duties, or tariffs, exist to protect local industries from imports. Over the years, however, they became the big revenue source for our government.

They are horrible taxes. They disincentivize local consumption. We produce almost nothing so there are no cheaper local goods to consume. We are stuck having to pay for highly taxed imports.

Logically, Bahamians should be complaining about customs duties and demanding their removal – but for those few industries that need protecting. Sadly, though, our people do not understand the costs associated with their bills. They’d buy an item that has a hidden 45 percent customs duty and then complain about the 7.5 percent or 12 percent VAT. It’s the duty that’s ridiculous and causing so much hardship. VAT at 7.5 percent or 12 percent is reasonable to pay if there is no high duty associated with purchase of the good.

By removing most duties for retailers the government would make the cost of shopping in The Bahamas much, much cheaper. And it would not lose revenue. In fact, it might gain. With cheaper prices people would consume more here – paying VAT on each purchase. There’d be no need to fly to Florida to buy everything. We’d keep hundreds of millions of dollars in the local retail sectors.

The government is slowly getting there. The duties are being removed for retailers on clothes and shoes in the upcoming fiscal year. In the next two years we hope for the dismantling of the customs duty regime.

Few have thought deeply about the cost of goods in The Bahamas in this VAT debate. There has been too much overly simplistic emotionalism.

If at the end of this three-year plan we wipe out virtually all the high taxes of the duty system, we would have lower taxes. And all of that would have started with a VAT hike.

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