Fiscal reform and revisions to our taxation system are arguably the hottest topics in The Bahamas at the moment. The commentators on this very important issue have been diverse based on their expertise, professional background, political affiliations and objectives. While the variety of inputs has enriched the general discourse and invigorated the national debate among the populace, it has also contributed to the level of misinformation and frenzy on an issue that is so critical to the future of our country.
In the aftermath of the release of the government's white paper and draft legislation on tax reform, the discussion on the proposed value-added tax (VAT) has intensified with various stakeholders and groups expressing their views on the actions that should be taken to correct our financial imbalance. The suggestions have been generally constructive and have included proposals on the revenue and expenditure side. In this piece of the series, we briefly consider the role of consumption in the tax debate.
Decisions on government expenditure
There appears to be a general consensus that we arrived in this critical financial state due to practices by successive governments that were not always prudent over the years. In simple terms, we perpetuated the habit of spending more than we were earning. The imbalance created by this pattern has not been confined to The Bahamas and continues to impact countries across the globe as political leaders grapple with making the tough, albeit right, decisions for fear of backlash from the electorate at election time.
While it seems quite easy to suggest drastic cuts in government spending, it is not as straightforward when considered against the backdrop of the role of public expenditure in spurring economic growth. In the Bahamian context, the revelation that about 70 percent of salaries of public servants are deducted to pay for various goods and services - that is, to service consumer loans - adds to the complexity of this matter. This also highlights the impact that an irrational and/or ill-timed reduction of staff within the public service would have on our economy. The importance of caution in this instance does not eliminate the need for more efficiency and productivity within the public service.
The link to private consumption
Over the years, a number of local economists and financial analysts have decried the lack of a culture of savings and investment by Bahamians. It has been reported that about 95 percent of Bahamian dollar personal savings accounts have a balance of less than $10,000. Of particular note is the fact that statistics suggest that the average balance is less than $1,000. When considered in conjunction with the percentage of salaries earmarked for financing consumer loans as highlighted above, the overall picture raises serious concerns.
While we do not have the corresponding figure for the entire Bahamian workforce to include the private sector, the government remains the number one employer in The Bahamas and it is apparent that a debt crisis spurred by consuming more than we earn may not be farfetched.
The importance of consumption within any economy cannot be emphasized enough primarily due to the correlation between consumer spending, economic activity, business turnover, employment and economic growth. However, when consumer spending takes place on a large scale by individuals without the requisite financial wherewithal and is financed by loans obtained by persons who do not have the capacity to pay, the consequences can be devastating in the long run. The establishment of a credit bureau and prudent lending practices should assist in addressing this issue. However, the culture of spending more than we earn or can afford is not sustainable and will require a paradigm shift.
Taxes and discretionary income
One of the main points that have been raised in the tax reform debate has been the regressive nature of our existing tax system and the proposed VAT. There has been considerable debate on the need for a tax system that takes into consideration the earnings and purchasing power of persons in the allocation of the tax burden. The discourse has featured consistent reference to disposable and discretionary income of the populace. It is noteworthy to state that while disposable income generally refers to income after taxes, discretionary income is the amount of the disposable income left after deduction of other expenses such as utility bills and further expenses necessary to maintain a certain standard of living.
The opponents of VAT have cited income tax and payroll tax as viable alternatives while rightly stating that there is hardly any country with a consumption or sales tax system that does not also have a form of progressive tax such as income tax. Payroll taxes are levied on the payroll of employers and are paid either from employees' wages or employers' funds based on the wages paid. It has been stated that the existing infrastructure for the remittance of national insurance payments and business license fees provide for the easy implementation of an income or payroll tax system.
The counterargument on the inappropriate nature of income tax focuses on the fact that it discourages hard work, investments and individual progression. It has also been postulated that income tax in the current environment of sluggish economic growth and high unemployment will not broaden the tax base enough to generate the amount of revenue required to address our financial situation. This is not unconnected to the inability of income tax to capture some residents of The Bahamas as well as individuals outside of the organized formal economy who consume both goods and services within this nation.
Few questions to consider
There is no doubt that VAT in its strict sense is a regressive form of taxation, albeit as proposed it is expected to be more progressive than some of the existing taxes we have. Vital questions abound in this tax debate. In light of the demands on government, how much more can we tax our people? How much mandatory non-discretionary tax can Bahamians afford to pay since we have to raise additional revenue? VAT is a consumption tax which is paid by the final consumer; hence, the discretionary element of the VAT gives the taxpayer some control as to when (in terms of goods and services procured) and how much tax they pay (based on their level of consumption). Could this be useful in addressing our macro- and micro-debt crisis without hurting the economy? With the current rate of unemployment and underemployment, can the average worker afford more compulsory deductions from their wages? If businesses are taxed some more in the form of corporate tax, how do we expect them to create more jobs? Would we rather tax natural and corporate entities rather than consumption?
Politics and the tax debate
As can be expected in all debates with consequences for the country, politics continues to play a major role in the fiscal and tax reform discourse. Politicians must remember, however, that good politics is about serving the public in the national interest. It is no doubt convenient to postpone tough decisions and it is fair to say that we are in this predicament because successive administrations have been guilty of deferring the issue of tax reform arguably due to the potential backlash at the polls as well as appeasing foreign investors and the wealthy.
The Bahamas is bigger than any one individual, interest group or political party. There is too much at stake for us to base decisions of national importance on the potential outcome of the next general election; our focus should be on the next generation and the preservation of our commonwealth. The government has an obligation to make what it deems to be the right decisions based on the facts available considering feedback received from various stakeholders. Subsequently, it will be left to future generations to judge this administration for positions taken and/or decisions deferred.
We must continue to hold successive administrations to a high standard and level of accountability as it relates to the prudent management of our economy and the exercise of fiscal discipline from year to year. However, we must not forget the fact that a major overhaul of our tax system is inevitable and required for the sustenance of our freedom and national development.
o Arinthia S. Komolafe is an attorney-at-law. Comments on this article can be directed to a.s.komolafe510@gmail.com.
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