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The political realities of our tax system

The Bahamas is a democracy with a cantankerous electorate. It’s been 22 years since we reelected a government. And with the current moodiness of the people, it will be a challenge for the Free National Movement (FNM) to be returned.

From time to time there is chatter about the need to change our tax system. Most recently the International Monetary Fund (IMF) recommended a tax review with the aim of creating a more equitable regime.

“Fiscal policy should play a greater medium-term role in achieving public policy objectives, including greater income equality,” the IMF said in its recent staff concluding statement of the 2019 Article IV Mission to The Bahamas.

“The Bahamas does not levy income or capital gains taxes, relying mostly on VAT, business license fees, and international trade taxes.

“Global tax trends and the prospective accession to the (World Trade Organization) WTO thus present an opportunity for a comprehensive review of the Bahamian tax regime with a view to achieving a more equitable and less distortionary tax system.

“To strengthen transparency and inform future policies, a quantitative review of existing tax and other investment incentives is recommended.”

The government implemented VAT at 7.5 percent in January 2014. It was the first time Bahamians were confronted with a regular, in-your-face tax. The large hidden customs duties went unnoticed to many.

Last year, the Minnis administration increased the VAT rate to 12 percent. There was mass hysteria. In the press, on radio, and on television, there were lots of over-the-top commentary stating that the increase would prevent poor people from eating; it would cause the economy to tank; how unfair it was for Bahamians to have to pay more.

The backlash was extreme, and severe. So much so that the Minnis administration is unlikely to raise VAT again this term.

A revision of the tax regime was also advised by the Vulnerability Assessment Study by BKP Development Research & Consulting, which recommended The Bahamas implement income and corporate taxes in order to compensate for revenue losses that would result from accession to the World Trade Organization (WTO).

The Bahamas currently holds WTO observer status. However, the government wants to complete negotiations to obtain full membership by the end of the year.

If the Bahamian people reacted in such a hostile manner to a VAT increase of a few percentage points, what do income tax supporters think they would do if the government proposed taking 20, 30, or 35 percent of their incomes each year?

They would revolt. You’d probably have riots.

Corporate tax? The local business community would be up in arms about that, too. The government would face well-financed lobbies to end that idea, and its term in office.

Politicians can only bring their people along so far at a time. That the Progressive Liberal Party (PLP) was able to implement VAT, and the Free National Movement (FNM) was able in inch it up a bit, were major tax reform achievements.

We doubt the people have any appetite for new taxes or further tax increases. Any government advocating these measures, at a time when we are finally emerging from the lingering effects of the Great Recession, would be committing political suicide. That’s the simple reality of where we are.

The income tax lovers in The Bahamas need to put that dream out of their minds. The people do not want the tax. Neither party is stupid enough to suggest it.

What should be the next plank of reform is lowering or removing customs duties. VAT now allows the government to collect revenue through consumption. The duties make prices ridiculously high. By removing the duties, prices, in time, would fall, incentivizing consumption. It’s unclear how much more VAT would come in if Bahamians were to shop more at home because local prices were more reasonable.

The people would be warm to ideas such as these that lower their burden to the state. They have no interest in having to pay more.

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