By its nature, a value-added tax (VAT) affects the whole domestic ecosystem of an economy. It applies to everything. That is how it is intended and that is its strength. As such, the application of “exemptions” is meaningless, because everywhere the recipient of the exemption turns, he still has to pay VAT in order to use the money he has “saved” via the exemption.
To put it in simple terms, take the poor individual who supposedly benefits from zero VAT on corned beef. What happens to the 24 cents he saves on a can of corned beef for breakfast? Does he keep it in his pocket or a piggy bank forever? If so, it has no utility. Besides, in an environment where even middle-class Bahamians cannot afford to save money, it is very unlikely.
In fact, he spends it. And whether he spends it on a chicken snack for lunch, on clothes for his family, on toiletries, car parts or on a numbers ticket, he then pays VAT. The same applies to VAT “holidays”. Unless the holiday lasts forever and covers literally everything needed to sustain life, then it is meaningless, since any money saved attracts VAT when spent.
VAT exemptions are futile in helping the poor because the overall effect of VAT is to make the general cost of living 12 percent higher — meaning, the money “saved” isn’t saved at all. It is merely deferred for later payment. Moreover, if it did work, it would result in lower revenue yields, prompting government to increase the rate of VAT on everything else.
Of course, every economist knows this, and most informed individuals can figure it out. So, why do some politicians continue to sell VAT holidays or exemptions as a pro-poor measure? The short answer is that they are either extremely ignorant or they think that you are.
The long, and more troubling, answer is that they are scrambling for a cheap and easy distraction from larger issues that they have no intention of addressing. In The Bahamas, this means diverting public attention away from government’s fundamental commitment to a tax regime that makes poor people pay the bill for tax breaks for rich people. Lipstick on a hog, if you will.
For the record, in most countries, taxes on consumption (which everyone agrees disproportionately affect the poor) make up around 30 percent of revenues, while taxes on income and property (which affect wealthier people) make up around 70 percent of revenues.
In The Bahamas, merciless taxes on consumption make up more than 70 percent of revenues, while taxes on the highest-end luxury properties get concessions (a $60,000 ‘cap’, in fact) and income taxes don’t exist, even for local corporations that rake in hundreds of millions of dollars exclusively from the pockets of over-taxed local consumers.
It is the most regressive tax regime of any independent country in the Americas — and government repeatedly confirms it has no plans to change it.
To now try to deflect from this issue with cheap gimmicks that will have zero net effect on anyone (least of all the poor) is to insult the intelligence of every Bahamian.
— Andrew Allen