Bad economic distribution is our problem
In its 2019 report, the UN’s Economic Commission for Latin America and the Caribbean (ECLAC) noted a slight downward trend for foreign direct investment (FDI) in our region.
A breakdown by country discloses that Barbados (our closest peer in terms of population and development) attracted $91 million in FDI last year. Jamaica, with eight times our population, is presently enjoying a rare period of economic growth. It attracted $775 million. The Bahamas, with a population under 400,000, declined five percent to $947 million.
So, The Bahamas (in a bad year) attracts FDI amounting to about $2,700 per citizen. That is an astronomical figure and places us in the top two percent of countries, far ahead of any major “developed” country.
Yet the tax receipts that materialize from that investment have never pushed us above the 20 percent of GDP threshold (the world average is 40 percent) and benefits to the economy are minimized by policies of austerity and high taxes on the poor and middle class.
In other words, The Bahamas’ failure in relation to international capital flows is not one of attraction, but rather of distribution. Yet many of our policies on taxation, wages and regulation seem predicated on the former assumption.
A good example is our approach to real property taxes.
When the Ingraham government repealed the Immovable Property Act in the early 1990s, it led to an immediate explosion in the real estate industry.
Predictably, though, the effects were both good and bad. It visibly revived the economy of places like Exuma, which now has a population more than three times what it was when I served as an (FNM) election volunteer on the night of August 19, 1992.
But it has also contributed to the pricing out of even middle class Bahamians from choice Bahamian real estate.
In Harbour Island, locals have been physically displaced with no hope of ever buying a piece of the rock again, while in Nassau the “middle class” is now rubbing shoulders with “the ghetto”, having seen the reversal of the mass movement from Centreville and Mason’s Addition to San Souci and Winton that marked the Pindling years.
In addition, the profile of those benefitting most from employment in the real estate industry has been narrow and restrictive.
These predictable downsides could and should have been balanced by a strong upsurge in real property tax receipts, a mechanism readily available to the government, and without potential political fallout, since Bahamians do not pay in the Family Islands. Instead, governments have exhibited an absurdly concessionary approach to real property taxes on foreigners, apparently confusing the issue with our tax-concessionary approach to the financial services industry.
But the two issues are apples and oranges. Investors in offshore trusts place their money where it is safe, well-regulated and untaxed. This in turn creates well-paid employment in a high-end industry. A foreigner buying a home in The Bahamas creates minuscule employment and helps price Bahamians out of their own real estate. To forego healthy tax receipts from such a source is an economic crime against the governed.
Further, nobody from the U.S. or Canada expects to pay exorbitant prices for land without paying hefty real property taxes.
As a real estate attorney, I am well-acquainted with the look of bemused shock on the faces of foreign clients when they learn how paltry real estate taxes are in The Bahamas (and how non-existent is the risk of losing their property for non-payment).
As an insight into the mindset behind such asinine policy, I was recently criticized by a letter writer calling himself “The Graduate”, who took issue with my letter criticizing the government for backing down to some Lyford Cay landowners, demanding a lower rate of real property tax for themselves than for homeowners in Garden Hills.
The Graduate reminded me that these days “investors” can go anywhere, so, (presumably) we had better join the rush to the bottom lest they desert us en masse.
Of course, he didn’t bother to explain how homeowners in Lyford Cay actually benefit the economy of The Bahamas, or what their contribution is to the $947 million in foreign investment we attract in a bad year (hint: nil).
While “The Graduate” (whose identity is known to me) is far from an economist, it is shocking how widespread and persistent such mixed-up views of our economy actually are. And this in turn leads to irrational and self-harming government policies.
And nothing represents our self-harming failures of distribution more than the well-rehearsed canards repeated in resistance to raising the minimum wage.
All Bahamians (even those comprising the government) know that the lifeblood of our economy is foreign exchange from large scale investments that channel spending in the tourism industry. But few seem to understand that the primary mechanism by which that spending enters the domestic economy is by wages paid to Bahamian workers.
In any consumer-driven economy (such as the domestic Bahamian economy) policies that suppress wages suppress economic growth. Additionally, wage boosts and tax breaks at the lowest end of the wage spectrum boost growth more than savings or income growth at the top or middle.
To maintain entrenched tax concessions on the top income brackets (personal and corporate income tax, real property tax) while simultaneously heavily taxing the poor and suppressing their wages is to stunt consumer spending.
In other words, there is simply no valid economic argument for government’s failure to substantially increase the minimum wage. Statements that it will harm employment growth or economic growth are simply bunk. It would do precisely the opposite, by redistributing more of the earnings of employers to the income group from which most consumer spending originates.
– Andrew Allen