The 2018/2019 budget, pt. 2
“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
– Winston S. Churchill
On Wednesday, May 30, the minister of finance presented the 2018/19 national budget. In his budget communication, the minister detailed the government’s plans and proposals for the fiscal year that begins on July 1, 2018.
Last week, in part 1, we reviewed the budget communication to address the macro-economic rationale for the government’s decisions relative to its budget for 2018/19. The minister promised to end past practices of fiscal mismanagement by former governments and adopt an approach that is “responsible, transparent and accountable”.
To accomplish this, the minister fomented a frenetic furor over his proposed value-added tax (VAT) increase from 7.5 percent to 12 percent and the punitive and potentially destructive taxes that will be imposed on domestic gaming operators.
This week, in this second installment on the budget, we would like to Consider this… What is really behind two of the more controversial elements in the 2018/2019 budget?
The increase in VAT
The government indicated that VAT will increase from 7.5 percent to 12 percent on July 1, 2018. That represents a 60 percent increase, which is concerning from several viewpoints.
As far back as June 17, 2015, while he was leader of the opposition, Dr. Hubert Minnis said, “It is a crying shame that old age pensioners struggling financially in the golden years are forced to give back $7.50 out of every $100 that they receive monthly to pay VAT.” In light of this, how do the prime minister and the minister of finance justify taking even more money from such old age pensioners by virtue of the increased VAT that will be charged on many consumer items?
Secondly, late in 2016, Dr. Minnis, then leader of the opposition, said, “I don’t believe in increasing taxes; I believe in decreasing taxes and increasing opportunities. Increasing taxes is a lazy way out; when you don’t want to think, you just tax.”
Third, when the current minister of finance was in opposition, he likened the introduction of VAT to “jumping off the cliff”. That was when the VAT rate was 7.5 percent.
What accounts for the radical flip-flop by the present government on the issue of VAT? While in opposition, the Free National Movement (FNM) voted against the introduction of VAT. But now the minister of finance is strenuously arguing for a VAT increase to 12 percent, a whopping 60 percent increase over what was initially set by the former administration.
The most disturbing development about the government’s approach to the VAT increase is that there was no consultation with the key socio-economic stakeholders of our society who would be directly affected by the increase. The former administration established a workable template of how to introduce new tax legislation, by engaging in prolonged, widespread consultations with key stakeholders when VAT was first introduced.
That the current administration would proceed with such an enormous increase without similar stakeholder consultations is a betrayal of trust by the government, as manifested by so many key stakeholders who have expressed their deep concerns since the announcement of the VAT increase.
Equally disturbing is the government’s seemingly accelerated timetable to balance the budget, which is the reason it has decided on the enormous 60 percent increase in VAT. The government indicated that, in order to balance the budget within three years, it needs to generate additional revenue. While that is true, the more important question is whether the best time to increase VAT is now and, if so, is 12 percent the correct rate? Furthermore, what is the rush? Why must this be done in three years?
Are the government’s motives politically driven by the time-horizon connected to its prospects for reelection in 2022? Is the government really motivated to balance the budget because it believes that, if it can accomplish that objective in three years, it will enhance its prospects of getting reelected?
The government must address why a longer time frame of six to 10 years is not more practicable, particularly in light of its plans to enact financial responsibility legislation. Furthermore, will the rapid VAT rate increase propel us toward a recession which would have even worse consequences for individuals and businesses than the benefits that will likely accrue from the government’s gamble?
Destroying the domestic gaming sector
The government has proposed a sliding scale of taxes for gaming house operators (operators). At the low end, the tax to the operators who earn up to $20 million in adjusted gross revenue is a rate of 20 percent. Therefore, if an operator generates adjusted gross income of $20 million, that operator will pay a tax of $4 million. The current tax is 11 percent on such revenue; therefore, current tax on that revenue is $2.2 million, $1.8 million less than is currently proposed. On the other hand, an operator who earns more than $100 million of adjusted gross revenue will be taxed at 50 percent, or half of his revenue, in excess of that amount.
In addition, the government has proposed that all patrons who engage in domestic gaming will pay a five percent tax on the money that they deposit on their gaming account with the operators.
We believe that both of these government proposals are enormously onerous, unjust, inequitable and inappropriate. These taxes could drive some operators out of business, or worse – back underground, where they operated before the regulation of this industry. A considerable number of jobs will be lost in the sector as a result of the closure of those businesses that are unable to continue as a going concern because of the excessive taxes imposed by the government.
When one observes that these taxes apply only to the domestic gaming sector, and not to the foreign-owned casinos, it becomes patently clear that the government has discriminatorily targeted the wholly Bahamian-owned domestic gaming sector and its Bahamian patrons.
Some government ministers, who were – and are – opposed to the regularization of the domestic gaming sector and who voted against the former administration’s efforts to do so, now appear to be determined to decimate the sector by expropriating the operators’ revenues through excessive taxes.
This is perverse on several levels. In the Christie-led administration, the gaming operators enjoyed a partnership with the government. At that time, both partners approached the regularization of that sector in a spirit of collaboration and cooperation in order to maximize the tax for the public purse, while recognizing that these innovative entrepreneurs were entitled to a reasonable return on their investment. This spirit of collaboration and cooperation no longer exists. The government has broadsided the operators with a view to possibly taxing them out of existence.
The most reasonable explanation for the government’s approach is that either it intends to decimate the sector by taxing them into oblivion or to replace the service that the operators provide by establishing a national lottery from which the government will receive all of the profits.
An alternative explanation, which is even more perverse, is an attitude by some ministers that these young, black, professional entrepreneurs, whom they perceive to have made too much money in a very a short period of time, should not be facilitated by the state. Therefore, it is their position that government should use the most effective method for stopping them: tax them out of existence, which will make room for their supporters, who are similarly financially well-disposed, to take over the industry.
The operators have indicated that they intend to fight the government’s obscene endeavors at expropriation in the courts in order to seek an equitable solution to this insidiously perverse, misguided and inequitable arrangement that has been foisted upon them.
Once the operators commence legal action, the government should appreciate that the operators could exercise their right to withhold the payment of gaming taxes in escrow until this matter is resolved in the courts, however long that process takes. This could have the potential of depriving the government of many millions of dollars that the operators will escrow until this matter has been satisfactorily resolved by the courts.
The truly ironic unintended consequences of this excessively inequitable expropriation of gaming income is that the government would end up earning less money from the industry, not more.
Next week, we will review how the budgetary measures will affect average Bahamian citizens.
For the time-being, it is important for the government to seriously consider the observations of the key stakeholders in the private sector and the NGOs who have expressed serious concerns about where we appear to be heading with some of the ponderous and oppressive proposed tax revenue measures, and what our lives will be like when – and if – we get there.
- Philip C. Galanis is the managing partner of HLB Galanis and Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to [email protected].