Death, taxes and childbirth! There's never any convenient time for any of them. - Margaret Mitchell, "Gone with the Wind"
Over the past few months, there has been considerable debate about the government's plan to introduce a value-added tax (VAT) regime in The Bahamas by July 1, 2014 and also about the likely effects that such a tax will have on the Bahamian economy. In fact, the government has made the introduction of VAT the cornerstone of its efforts to reform the country's taxes.
In a series of articles on VAT over the next few weeks, we will address the benefits and costs associated with this new tax system and the challenges that we will face with its introduction and operation. This week, we will begin the VAT series and ask our readers to Consider This... just what are the facts about the state of the country's finances that have necessitated such a quantum shift in our tax system?
Central to the discussion of the country's finances is a clear understanding of four basic concepts: gross domestic product, government revenue, the national debt and expenditures. A serious consideration of the facts about the nation's finances must engender a discussion and understanding of each of these four components. This week, we will consider two of the four components, namely gross domestic product and government revenue.
Gross domestic product (GDP)
Normally referred to as GDP, the gross domestic product is the total value of the nation's output or the size of our economy. Even more simply put, GDP is the total value of money that is generated annually by the economy. It is an important economic indicator for two reasons: (1) it measures the total size of the economy and reflects its growth or contraction over time; and (2) many of the other financial indicators such as revenue, expenditure, the deficit and national debt are reflected as a percentage of this widely accepted measurement in order to provide an indication of how we are doing generally and how we compare with other countries.
Based on information provided by the Department of Statistics, the GDP for the past six years is as follows:
Fiscal year
2008

$8.283

2009

$8.034
2010

$7.854
2011

$7.881
2012

$8.011
2013

$8.261
We can see from the information above that, for the fiscal year ended June 30, 2013, the Bahamian economy returned to the general level of output achieved in 2008. The intervening years reflected a contraction in the economic output as a result of the world-wide recession.
The International Monetary Fund (IMF) forecasts that our GDP will grow at rates of between 3.4 percent to 4.7 percent for the years 2014 to 2017, reflecting both a recovery from the recession and natural growth of the economy. The projected GDP for 2014 to 2017 is presented below:
Fiscal year
2014

$8.539

2015

$8.905
2016

$9.313
2017

$9.750
It is important to note that an overwhelming amount of the country's economic activity is generated in the area of services. It is estimated that the services, industrial and agricultural sectors account for approximately 91 percent, seven percent and two percent, respectively, of total economic activity. Hence, The Bahamas has developed a vast services economic platform. We will discuss the implications of this reality for government revenue generation in greater detail in subsequent articles.
Government revenue
The government derives its revenue from three broad categories: tax revenue, non-tax revenue and capital revenue. Tax revenue accounts for approximately 85 percent of total tax and non-tax revenue, while non-tax revenue accounts for approximately 15 percent of the total. Capital revenue, which is generated from the sale of government assets, is generally negligible except for the sale of BTC in fiscal year 2011.
For a very long time, customs duties and excise taxes constituted the largest share of tax revenue. Customs duties are import taxes that are imposed at the border on imported goods and the schedule of such taxes could range from a low of duty-free items such as for breadbasket commodities to an average rate of 35 percent for certain imported goods to even higher rates in other cases.
Excises taxes are different from customs duties. Whereas customs duties are import or border taxes, excise taxes are imposed on goods manufactured or produced and sold in The Bahamas as well as certain specified imported products. For example, tobacco, alcohol and gasoline are the three main targets of excise taxes in most countries around the world as they are in The Bahamas. These are everyday items of mass consumption that generate huge revenues for governments. Tobacco attracts an excise tax of 220 percent, and gasoline is taxed at more than $1 per gallon. We also impose excise taxes on imported cars, in some cases as high as 82 percent of the first cost.
Historically, The Bahamas has not imposed taxes on capital gains, corporate earnings, personal income, sales, inheritance and dividends. Instead, we have relied on a very narrow range of revenue sources other than customs duties and excises taxes, namely real property taxes and stamp duties.
Hence according to Minister of State for Finance Michael Halkitis, "Our current system is one where the burden of taxation falls on a relatively narrow base of goods and makes us particularly vulnerable to economic shocks."
For the years 2008 to 2012, recurrent revenue has remained virtually static in the range of $1.2 billion to $1.4 billion. The recession has adversely affected economic activity and consequently tax collection.
Additionally, the government revenue as percent of GDP in The Bahamas is approximately 17 percent, which is low by a regional comparison of approximately 22 percent, which accentuates the need to increase the revenue base in order to bring us in line with our regional neighbors. The most effective way to achieve this is to broaden the tax base to ensure that a wider cross section of the goods and services available within our economy are subject to taxation.
The WTO and taxation
In addition, The Bahamas government has applied for membership in the World Trade Organization (WTO) and would like to complete that process by the end of 2014. The WTO, whose primary mandate is to level the playing field for trading between its member states, as a condition of membership has required its member states to reduce, if not eliminate, what it perceives to be barriers to trade.
Historically, one of the most effective national tools that countries have employed to limit trade within their borders is the imposition of customs duties. Ironically, in the case of The Bahamas, we have not used customs duties as a barrier to trade because we produce very little that we would wish to protect from the importation of similar and competing products. In reality, for us customs duties have primarily been a vitally important revenue measure, as we have already noted.
Accordingly, The Bahamas' accession to the WTO creates an interesting and perceptibly intractable quandary: How do we join the WTO, which by its very nature will require us to eliminate a significant portion of the government's revenue, while simultaneously being able to continue to offer the level of public finance to which we have become accustomed? The answer to this question lies at the heart of reforming our taxes.
Conclusion
Next week, we will review the state of the nation's expenditures and the resulting impact on increasingly challenging deficits, as well as the national debt. In subsequent articles, we will closely examine alternative tax options and provide our assessment of the government's planned value-added tax.

o Philip C. Galanis is the managing partner of HLB Galanis & Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.

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