The debates on taxation are reigniting. The country faces a narrow and not so clear path but will have to confront its taxation regime soon. There is absolutely no way of getting around that fact. Unlike other commentators, I believe that the options are wider than being espoused, even if not all positive, and the impetus for change will be internal rather than external. While confronting the tax regime does not necessarily mean a change from a regressive to a more progressive one, there are attendant public policy matters that on careful analysis will lead to or will emerge because of that confrontation.
In March of this year, I wrote an extensive piece under the heading “A taxing affair ahead”. The latter portion of that piece dealt with the matter of taxation policy and the pressures that could influence a shift to include the implementation of income/corporation tax. Since then an election has come and gone and available information suggests, with greater certainty, that there is little or no desire for exploring any other forms of taxation, despite whatever compelling reasons might exist. The big question is whether this position is tenable and if not what flexibilities are available to the country in the face of this reluctance.
I wrote in March: “In the heights of the crisis, a prominent economist first raised the idea of the possibility of The Bahamas entering into an IMF arrangement. The response then of the governor of the Central Bank is very instructive. In seeking to assuage the tension created by that statement he declared that before creditors get hurt taxes will be levied (paraphrase). Prominent commentators have out-rightly stated that there is a need for income tax or lament the inequity of the current regressive tax regime or the inadequacy of the current regime in financing government programs. There have been questions posed to policymakers as to whether income tax will be (or at least should be) considered. It would appear that at least in certain quarters the conversation around income taxes is becoming a bit more comfortable and definitely more serious.”
The excitement has since died down with a general acceptance that a structural adjustment program of the cards. In my mind, the fundamental issue on which the matter of taxation should turn has not changed. The country has a massive debt burden, narrow fiscal space, and very limited government revenue compared to its debt obligations, weakening national infrastructure and increasing demands for public goods and services. The prime minister foreshadowed this when he stated the desire to increase government revenue to 25 percent of GDP. Taking into consideration that approximately 18 percent of government revenues goes to service debt. Considering that over $2B in principal debt repayment is due within a short time horizon and the current budget deficit remains largely unfunded. The question that ought to be troubling our minds is not whether the EU/US/OECD will force the country to adopt corporation tax but rather where will the funds come from to honor these obligations, run the country sustainably, invest in infrastructure for future growth and secure resiliency to stave off the perennial vulnerabilities it faces.
Back in March, I stated, “It is my view that despite the lack of direct responses from the political directorate, the time is here for a real shift in the tax regime. The current circumstances [the economic realities of the country] would dictate that we take hold of the boogeyman bag (taxation), so as not to bring greater harm to a very vulnerable segment of poor persons. Nevertheless, even if that bag is rejected there may be increases in some other areas if the larger concerns surrounding debt default and entrance into structural programs are to be circumvented. I believe that in the near term, the future of The Bahamas rests significantly in the strategic moves that will be made over the next few months. It is for this reason that I cite the obvious election season given the propensity for shifts in policy positions or delays in making decisions which may be inconsistent with the desired outcomes of parties. It is easy to accept that in close proximity to an election the likelihood of tax increases becomes difficult to imagine.”
Leading into the election both major political parties stated unequivocally that there would be no tax increases with the eventual victor, the PLP, promising to reduce VAT. This signals very clearly how the political directorate is reading the Bahamian appetite for new taxes of any form. The subsequent implementation of the VAT reduction though should be instructive. The reality is that, with an eye on the deficit, any tax movements that reduce revenue are not on the cards, it’s simply not in the interest of the country at this time to deplete any revenue source.
The challenges are real and difficult. One has to honestly and objectively accept that the critical mass of debt; the emergence of external pressures; the consistent debilitating trends in downgrades and the tension between party objectives and what is in the best interest of the country have placed enormous pressure on the policymakers to create a balance.
There is no argument about the current tax regime. It is dominantly regressive and consequently, it is always going to be inequitable by nature. Other principles in The Bahamas are arguable. Convenience has certainly improved and is improving, we are fully aware of why we pay certain taxes and the basis of payments. Efficiency though, remains questionable. Are we at our best in the administration of the existing tax regime, therefore, guaranteeing optimal effect? Based on ongoing public pronouncements the answer appears to be no and would therefore affect the sufficiency argument. Is the country leaving significant amounts on the table, uncollected, improperly collected, collected and leached? However that pans out the result of our perennial deficits suggest clearly that government revenue and consequently the regime, as currently structured, is insufficient to meet the country’s needs. It is for this reason, following recent record deficits, that I posit the idea that the internal drivers for reform of the tax regime are much stronger than the suggestions of external bodies.
These were my views in the March piece, “Chief amongst the challenges faced by the country is debt and threats by external organizations. The state of the country’s debt draws our attention to what could emerge should there be no rebound. As noted above there have been important questions raised by many about the sustainability of the country’s debt. With national revenues where they are today and the challenges we have (temporary but there will be lingering effects), creditors’ well-being will at least put adverse pressure on the provision of other public goods and services. In other words, creditors must be paid first as the country will never jeopardize its credit rating by defaulting on debt. That simply does not happen in this region. In the recent budget presentation, it was revealed that government revenue to GDP is in the region of 14 percent. This is relatively low, definitely an impact of the downturn. However, historically the Bahamas has always lagged behind its peers in this metric. The longstanding, and recently renewed discussion has been the need to increase it to 20 percent (PM recently stated 25 percent). If this is correct and necessary, the question is how we will get there. One thing I am confident of is that we should all start getting prepared to pay a little bit more. The only way to get there, in the face of all we have discussed to this point, will be through new taxes, and unless it can be shown that more effective administration can and will produce the difference between the two yields.”
With debt servicing eroding the productive capacity of the current narrow revenue space, and likely to increase, we have to come to grips with where we go from here. The path to increasing taxation yields is obvious. Recent pronouncements by two influential commentators, James Smith and Gowon Bowe, are instructive, important but largely externally focused. Given my observation that the Bahamian psyche is conditioned to readily reject external pressures, it may be useful to turn the conversation inward for greater effect. To Gowon Bowe’s point, failing to protect the financial services industry, to have a clear strategy for the inevitable broadening of any external initiative will ultimately result in reduced revenue. Further, the inability to generate higher levels of government revenue will place debt ratings at risk and increase rollover risk, which if we were to admit it is already very high. The regressive tax regime appears to be unsustainable for the future but a progressive one will be highly disruptive to the country’s value proposition, the main concern of James Smith. Note though that we must accept that the ability to fund the current and any future deficit holds direct influence from the willingness to demonstrate a broadening of tax revenue.
While there is influence, observe carefully that I state none of the preceding points from the perspective of the EU/US/OECD 15 percent minimum corporation tax initiative. This is all about where The Bahamas is and what needs to be done to protect and fix The Bahamas. These are concerns that must actively occupy our minds as a country. We must accept that the decisions are not easy by any means. We must further accept confronting them is ideal but not mandatory. However, we must also agree and accept that the consequences of whatever actions are taken, or not taken, hold very serious implications for the ambitions of a recovered, resilient and sustainable economy. As an economic organism, everything must and will balance in the end. The simple accounting formula is instructive here – income less expenditure equals surplus/ (deficit). In the case of the country, every point in this formula is dictated by public policy, whether explicit or derived. I anticipate that despite the vicious balancing act required the administration will make the policy adjustments that best serve the country.
In Part II, I will consider specifically the major points made in the recent debate around the EU 15 percent minimum corporation tax initiative.
• Hubert Edwards is the principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at email@example.com. Hubert specializes in governance, risk and compliance (GRC), Accounting and Finance. This and other articles are available at www.nlsolutionsbahamas.com.