I was speaking to a business associate in The Bahamas the other day. In exasperation the associate said, "I am in the same business I have been in for years but things seem like such a grind all of a sudden. What is happening?"
I asked the person, "If I took $500,000 a year from your business how would that affect it?" The reply was, "That would affect it a lot!" I then noted that the government of The Bahamas has begun to extract in excess of $500 million additionally from the productive sector of the economy of The Bahamas through new taxes, value-added tax (VAT) in particular, and fees. That is no small amount, I proffered, and further noted that this extraction is coming at a time when The Bahamian economy is already limping. This raises the age-old question: Does tax policy impact economic growth? More particular to our circumstances, has the Christie administration's new and increased taxation slowed the Bahamian economy?
According to a paper published by William McBride entitled "What is the Evidence on Taxes and Growth?" prepared for the Tax Foundation, a U.S.-based Tax Policy Think Tank, the empirical evidence is clear for the negative effect of taxes on economic growth. McBride wrote, "So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find 26 such studies going back to 1983, and all but three of those studies, and every study in the last 15 years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes."
In The Bahamas corporate taxes are virtually non-existent, though an argument can be made that our business license tax comes close. We have no real personal income tax, though national insurance deductions come close to being a benefits-based payroll tax. We are huge on consumption taxes, namely customs duties and the newly implemented VAT. The average customs duty rate in The Bahamas has been in decline since 1992, going from some 45 percent to about 25 percent in 2012. It was the pride and joy of ministers of finance to come to the Parliament on budget day to announce "no new taxes and no increases in taxes" to tumultuous table pounding of supportive MPs during that glorious period. Over that time, the Bahamian economy grew by an average of about three percent. The 7.5 percent VAT was implemented in January 2015 and since that time the economy has seen two years of economic contraction.
Most businesspeople and consumers believe that the VAT put a tremendous squeeze on them, both through the direct payment of it on the goods and services they purchase as well as the add-on hike in prices that businesses did in the wake of the VAT. Many businesses swear that sharp revenue declines followed the implementation of VAT. Does this mean that VAT caused such a decline? Not necessarily, a more academic study would need to be done to determine this. It does, however, raise serious questions about whether it might be so. I believe a case can be made for the tax's negative impact of our economic performance over the last two years.
Someone might rightly point out that we have had periods of significant contraction during 1992 and 2014 prior to the implementation of VAT. However, those periods included the periods following September 11, 2001 when the terrorists attacked the U.S., and 2008 following the great housing collapse in the U.S. Besides these periods, The Bahamas pretty much enjoyed positive growth of its economy.
A government cannot make the economy grow by its actions alone. However, it can by its action alone slow or halt that growth. Bad business, investment and tax policies can stagnate innovation, capital investment and personal income, all of which are necessary for economic growth. There is anecdotal evidence for this in the experience we have lived over the last four years. For this reason, we must be careful what we allow over the next five years and more. We need to be sure that the government we elect or the leaders we elect understand and are committed to pro-growth taxing and spending policies. No leader who loves the poor and cares for the average will be mediocre at encouraging robust economic growth in The Bahamas. Such leaders must have concrete, thoughtful and executable policies and programs geared towards firing the engines of this economy so that employment, profits and prosperity increase. Governments impact the economy and the economy impacts our quality of life. Get the right government and we improve our prospects for economic growth. Get the wrong one and misery abounds. The choice is ours.

o Zhivargo Laing is a Bahamian economic consultant and former Cabinet minister who represented the Marco City constituency in the House of Assembly.

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