Island Insights | Southern islands: tax-free economic zones
The Bahamian government’s move to increase value-added tax (VAT) will have an adverse impact on southern Family Islands and, by extension, all outer islands. Therefore, the government should consider making these islands an economic tax-free zone. While the 4.5 percent increase will impact consumers across all islands of The Bahamas, the brunt of this exercise will be felt by those consumers living in the southern Family Islands, particularly those who have yet to fully recover from major hurricanes that severely impacted the islands in the past two years.
The prices of goods and services are essentially higher on Family Islands for a number of reasons; one being the cost of trade and transport. Therefore, goods being shipped and sold to family island business owners are still subject to price increases, despite the reduction or elimination of duty on certain items. An increase in taxes will not improve this situation. The nature of VAT encompasses the theory of horizontal equity, where all consumers pay the same amount of taxes despite variances in income. But given the need for the country to achieve economic growth, is it a wise idea to apply the same level of taxation for those in the southern islands? The economies of these islands were already worse off compared to those islands in the north and central Bahamas.
With a hike in VAT, can the economies of these islands survive, or will residents be forced into domestic migration? The southern islands of The Bahamas include Acklins and Crooked Island, Inagua and Mayaguana, all of which are yet to be
properly developed, despite the islands’ range of opportunities in agriculture, marine tourism, real estate and eco-tourism.
A measure of taxes
There is often talk that the government’s move to raise taxes is a hindrance to the development of the country. This is not entirely true. There is some good and bad in taxation. The key is timing and the type of tax being implemented.
Taxes help to provide services to the country’s citizens. In the case of The Bahamas, taxes fund National Insurance, social welfare subsidies, the maintenance of prisons, the police force, a defense force, a public education system and a public healthcare system. Certain taxes are put in place to help maintain such services as well as to help the government achieve its goal of reducing the fiscal deficit. The task itself is much more complicated, but essentially, taxes are a form of revenue for the government. The Bahamas’ tax structure is unique based on the government’s need to service 14 inhabited islands that are home to local and foreign residents who carry different income brackets.
The government would like to capture revenue from every consumer living in or visiting The Bahamas. It does not consider, on a case by case basis, which constituency or island should receive more or less taxes. However, residents in the southern islands do not always have access or the same quality of public benefits compared to those found in the capital, Nassau, and on other Family Islands. Yet, residents on these islands contribute the same percentage of VAT.
If the government were to single out, for example, residents in a particular area known for higher unemployment and propose that VAT remain only at 7.5 percent, then the revenue forfeited would have to be found elsewhere. With no economic growth and opportunities for growth arising at a stagnant pace, the next best thing to do would be to borrow these funds.
It is fair to say that the weighted average of the population in the southern islands out of the entire Bahamas, would be minimal. Therefore, the removal of taxes from these areas would not be burdensome to the government because VAT is equally distributed across those islands where economic activity is better and the population size is more.
If today the government proposed that all taxes were to be lifted all across the board for southern islands, would the status quo change for potential local and international investors? Would there be an influx of investors attempting to bring their business to these islands? Perhaps, taxation is not the only issue at hand. Therefore, if the government were to eliminate all red tape related to doing business, eliminate tariffs and other taxes, and provide a small- and medium-sized enterprises (SME) fund to do business for local investors on these islands, would these islands see an increase in interest to do business?
In order to achieve much-needed economic tax-free zones, the government, along with local entrepreneurs, must learn to work hand-in-hand. Governments must allow entrepreneurs and investors access to capital opportunities and easy processes within economies that are better off, such as New Providence, Abaco and Bimini. Perhaps then, investors would see the need to expand their businesses or start up new companies on these islands if they are allowed room to successfully grow their companies.
A position on taxes
Taxation has been a bone of contention among residents of different countries around the world. In The Bahamas, taxes are always an interesting topic of debate, because you have those who simply do not want to pay taxes and then there are those who opine that their tax dollars are not being put to good use. In a developing country, governments bear tremendous pressure from global disruptions, local capital restrictions and red tape legislation. The Bahamas is no different. However, governments must know when — and when not — to make certain decisions.
For instance, the Bahamian government’s recent decision to increase VAT was partly done in an effort to help pay government arrears and improve the national debt. But an increase of VAT to 12 percent also comes at a time when unemployment remains high with consideration to the population size; there has been little to no economic growth in the past four years, and the margin of profit in industries such as tourism/financial services continues to become slim as these markets are becoming more saturated, leaving less room for a competitive advantage to be obtained.
The southern islands, along with other Family Islands, are not developed as other islands such as New Providence, Grand Bahama, Bimini or Abaco and therefore, do not deserve to be taxed the same way. The government should alleviate residents on these islands of VAT so that businesses can grow and investors are incentivized to do business on these islands. While these islands are a part of The Bahamas, circumstances differ for them, and the economic realities are much different. There should be serious consideration of this thought by the government.
• Roderick A. Simms II is an advocate for sustainable family island growth and development. Email RASII@ME.com.