The Coalition for Responsible Taxation is anticipating the country's first "forward looking" economic study of the impact of value-added tax (VAT) and other tax alternatives on the Bahamian economy and standards of living will "heavily influence" the government's decision-making process on tax and fiscal reform.
However, those involved in the study admitted yesterday that it cannot account for the question of how well the tax regime would be administered, or what would occur should there be a drop in compliance with the tax laws - a major concern for many with respect to the likely impact of VAT.
Calling the study "the responsible thing to do", Gowon Bowe, co-chair of the coalition, which is funding the study by UK-based consultants Oxford Economics, said that the study will be ready by early May and will inform the position that it will put forward to the government on VAT.
"I will be a public study and so the chips will fall where they may once we have that analysis and that position has been put forward," he said.
Bowe added that all efforts will be made to accelerate the results, but the focus will be on ensuring a "quality" study is produced.
The detailed plans for the study and the lead economist who will work on it on behalf of the coalition, Henry Worthington of Oxford Economics, were introduced at a press conference held at the Bahamas Chamber of Commerce and Employers Confederation's headquarters (BCCEC) yesterday.
The coalition co-chair said that notwithstanding government's plans to implement VAT on July 1, he thinks it is only natural that the study's outcome would "heavily influence" the government's thinking on VAT, given that it will provide a "very empirical" assessment of the various revenue and spending measures' likely impact on the economy.
"We believe there's enough clamor by the average citizen that it behooves them to take very serious consideration of all studies being done. This is not a back-of-the-envelope exercise we're conducting, it is costing us and we've hired a very competent group of economists to do so, so in that sense it's not a study that can be dismissed. Although it's still their judgment they have to focus on," Bowe added.
The study, according to Worthington, will provide a macroeconomic model of the local economy and will look at VAT and other tax alternatives' effect on GDP, employment, peoples' standard of living, earnings and real earnings. It will take into account the relationship between earnings and inflation, government debt and its impact on trade and the balance of payments. It will assume first of all that VAT is implemented at a rate of 15 percent on July 1, 2014, and that tariffs are reduced by a level commensurate with the rate of VAT.
To date, only two studies have been produced on VAT in the Bahamian context, one by the Inter-American Development Bank (IDB) - which the government pointed to as justifying the decision to implement VAT - and one by the Nassau Institute, which panned the idea of introducing the tax.

IDB study
Asked how reliable the coalition felt the IDB study was as a basis for determining whether VAT is the right tax for The Bahamas, Bowe said that one of the challenges with the study was that it did not look at alternatives to VAT, that it was not "forward looking" but instead looked at what would have happened over the proceeding decade if VAT had been implemented in 2001.
Worthington said a "critical" difference between the study he will undertake and the IDB study is the fact that the IDB study was a "counter-factual" that "looks at what would've happened" over the proceeding decade if VAT was implemented early in the 2000s, whereas the Oxford Economics study will be "forward looking", projecting the economic impact going forward.
He added that the IDB also did not "disaggregate" the effect of VAT on the various sectors in the economy as specifically as the study he is leading intends to, by breaking it down into tourism, financial services, agriculture and the industrial sector.
Bowe said: "We believe (the IDB study) is a credible study, but the fiscal position was vastly different then (when the IDB study assumed VAT was introduced, in the early 2000s) and in reality it had a very basic assumption which we're not certain will actually hold, which is that 100 percent of the excess revenue will go to paying down debt."
In this regard, Bowe and Worthington noted that the Oxford Economics study will not only look at a variety of different tax scenarios, including VAT at different rates and other forms of taxation, but it will also forecast what might happen in the economy overall under various tax regimes if the government were to vary its spending levels. Many stakeholders have called for the government to commit to reducing its spending levels if it is going to implement VAT to address debt.
Among the tax alternatives to VAT that will be factored in to the study are payroll tax, and the possibility that the government will - as it has indicated - regularize and tax the web shops come July 1.
Bowe said that income tax will not be one of the scenarios examined in the model.
"We're going to work with Oxford Economics to really pick the headline ones that would really have the greatest macroeconomic impact," he said.

Compliance and administration
Asked if the study would provide any comfort to those who are concerned about how low levels of compliance or poor administration would factor into the success of a VAT regime, Worthington admitted that such a study would not be the best means of examining how this variable could affect the outcome.
"Those things are better addressed via other means of analysis. We've spoken to various stakeholders and those issues have been brought up time and time again, so I'm not trying to deride their importance, they certainly are important but putting them into a black box model is not the appropriate thing. I guess we'll have to make some sort of assumption about compliance," he said.
Both Bowe and Worthington emphasized that no study or model should be expected to give a definitive answer on what is the right policy decision for the government with respect to tax, but each will add to the debate. Worthington stressed that the outcome of any model must be viewed in light of the assumptions inherent in that model, and subject to thorough contextual analysis.
Worthington and the coalition have now met with the Ministry of Finance and various Cabinet ministers, the Clearing Banks Association, the Bahamas Hotel and Tourism Association, major hotels, the Department of Statistics and the central bank.
The group has plans to meet with the Association of International Banks and Trust Companies (AIBT), representatives of the construction and the wholesale sectors, along with the Inter-American Development Bank, the International Monetary Fund, and the U.S. economists Prime Minister Perry Christie has asked to come in to conduct a further VAT study on behalf of the government.
Speaking in the House of Assembly yesterday, Christie said for the first time that if VAT is introduced, it will be introduced at a lower rate than 15 percent. He also said that the government is waiting to complete its dialogue with the private sector before it determines that there is "no alternative" to VAT.

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