Former Minister of State for Finance James Smith said yesterday the time has long passed for the government to begin reviewing the current tax system, adding that it is clear the system by which the government predominantly gets its revenue through customs duties and value-added tax (VAT) has to be reviewed.
Smith was weighing in on recent comments by Progressive Liberal Party (PLP) Leader Philip Brave Davis that should he win the next general election, his administration would determine whether VAT is still appropriate – a position Minister of State for Finance Kwasi Thompson called reckless and self-serving.
“I can’t speak for the leader of the opposition but I read it to be a review of the local taxation system, which means to look at existing taxes and also any other taxes that may not yet be imposed. I would presume that the idea is in a post-COVID Bahamas where the economy has changed drastically and not for the better in terms of wide deficit, slow or no growth and an enormous amount of new debt – it’s not a sustainable position for any economy, particularly a small economy,” Smith said when asked his views on if he believes VAT is still viable in the COVID-19 era.
“So you need to find ways of generating that kind of growth and therefore the government revenue to take care of your debt servicing, as well as to continue to fund your social services, health, education, et cetera. And clearly the existing system – though it might have served us well pre-pandemic and pre-Dorian – has to be looked at and reviewed to find ways to meet these obvious commitments that will be coming down the pipeline over the next few years.”
In December when he tabled the Fiscal Strategy Report in the Senate, Thompson said the government was focused on “equitable and progressive tax reform” as he highlighted the Minnis administration’s hope to grow the ratio of tax to gross domestic product (GDP) from 14.5 percent in fiscal year 2020/2021 to a high of 20.5 percent by 2024/2025.
The government has not detailed how it intends to transform the current tax regime to grow revenue.
“I mean the time is long passed. We should have been doing this maybe six months ago into the pandemic. We’ve got to do a lot of restructuring going forward,” Smith said about a plan for tax reform.
He continued, “So if the government funds its activities through taxation and if the existing tax base is unable to do that, it’s best you take a look at it and see how you can do that, bearing in mind that you have certain constraints where you don’t want to reduce standards of living or you don’t want to over impose the burden on certain sectors of society, especially the most vulnerable.”
The Christie administration introduced VAT in 2015 at a rate of 7.5 percent, and in 2018 the Minnis administration increased VAT to 12.5 percent.
Taxes on goods and services account for more than 77 percent of government tax revenues and the majority of that is generated from VAT.
Asked whether he believes there should be an increase or a decrease in VAT in this current economy, Smith – who was minister of state for finance when the first studies into tax reform including VAT were conducted, said there is no quick answer.
“I think first we have to assess exactly what government needs in terms of the total expenditure for what it is carrying now. It’s not just the tax side or the revenue side, it’s also the spending side. Government may be spending too much in certain areas that they need to reduce spending, even if it means offloading somethings that can be better accomplished elsewhere. They may have to recalibrate the tax system,” he said.
“Originally, when I got the first study done for value-added tax, at the time the idea was that you introduce the tax and simultaneously reduce duties. Neither of the governments did that and that’s a part of the problem. So you ended up with customs duties plus value-added tax, so the effective tax is higher than the 12 percent that you say.”
Still, he said, a review is critical.
“A lot of the direction you want to take has to be grounded in some sound analytical advice. You just don’t pop it out of the air. Taxes don’t work that way. You can increase a tax thinking that if I put $10 per unit that means for ten units I get $100, but it doesn’t work like that. You will cause people to not pay VAT or not import at that level, it’s called elasticity in taxation. And I believe that what has been done so far is they have simply took a linear view, of ‘if I increase it by ten percent I get ten percent more VAT’. It doesn’t work that way always,” Smith said.
“The best thing to do is to find out what are the critical expenditures the government needs to make, which would include obviously paying back the money borrowed and then what level of revenue do I need to cover that. And then you must make sure that you raise the revenue and you do so on an equitable basis, not where the low income people are paying more than the middle or high income. So all of these things have to be taken into account when you review a tax structure with a view to introducing any changes.”
The government has said it will carry out a review of the country’s tax regime, to develop a “road map of tax system reform recommendations that would introduce greater progressivity, fairness and stability”.
The government has also said it intends to increase revenue yield from existing sources by reinforcing the Revenue Enhancement Unit; using data to detect tax evasion; increasing VAT audits; increasing the use of third-party entities to improve revenue collection; strengthening the customs department’s Electronic Single Window to improve customs revenue intake; and by consolidating and completing the real property tax modernization project.