A top banker has argued that imposing an income tax would not deter the wealthy from moving to The Bahamas, arguing that this or a payroll tax would be preferable to the "very, very complicated" value-added tax (VAT) proposed.
Ian Fair, chairman of Butterfield Bank and former chairman of the Grand Bahama Port Authority (GBPA), told Guardian Business during an interview from London, England, that a fear of changing the "no income tax" model The Bahamas has promoted to wealthy expatriates for decades should not stand in the way of pursuing this approach to tax reform.
"No, I don't think it would," said Fair, a British expatriate and long-term resident of The Bahamas, of whether his proposal of an income tax as a better alternative to VAT would hurt this country's ability to attract high-net-worth, second home owners.
"Everyone is used to paying tax. It hasn't stopped people moving to the Channel Islands, which has a low tax. As long as it's fair and not subject to constant change, it could work," said Fair, who has extensive experience in private banking.
His position is in contradiction to that held by others who work closely with the financial services industry, including Ryan Pinder, minister of financial services.
During his contribution to the 2014/2015 budget debate, Pinder said that an income tax would be problematic given "our economic model and our culture" and would hurt The Bahamas' competitiveness in financial services.
"Much of our financial services industry is based on the fact that there is no tax on income, capital or inheritance," said Pinder. "An income tax would put at risk the 20 percent of GDP that the financial services industry represents in the economy and put at risk the indirect contribution to GDP of the financial services industry, 16 percent of GDP attributable to professional services that depend on the financial services industry. We also have a significant expatriate resident population that is in the Bahamas because there is no tax on income, capital or inheritance. The imposition of an income tax would likely put at risk this segment of our population that has (that) economic impact."
Fair urged that before considering changes to the country's tax regime, he is of the view that the government should do a better job of administering taxes already on the books, while raising funds and cutting costs long term by privatizing public corporations.
"My view generally is that I've always thought the best way was to more effectively collect existing taxes and to sell all the government-owned corporations, because that would free up money and introduce payroll tax, a flat income tax, with a threshold on those who pay it.
"I am not criticizing the government; we do need a new revenue source. I support the government on that for sure. I just think we should think more simplistically. VAT is a very, very, complicated tax; we are a country that isn't used to direct taxes; we need the simplest possible tax system and I'm not convinced VAT is it. It is a complex tax."
Fair also expressed concerns about the regressive nature of VAT. It has been widely acknowledged both inside and out of government that the implementation of the tax will hit the poor disproportionately, leading some groups, such as KPMG (Bahamas) to suggest that the design of the social safety net that will accompany VAT must be an "absolute priority" of the government over the next six months.
Fair said: "The fact of the matter is that since VAT is on everything, VAT is not an economic balancer like other taxes, a flat income tax or payroll tax. It hits the poor particularly hard because a far higher percentage of less-well off people's income is spent on things."
The government has proposed to implement VAT at a rate of 7.5 percent with no wide scale duty reductions on January 1, 2015. It had initially planned to bring in the tax at 15 percent on July 1, 2014, but backed down following widespread private sector opposition.
In studies performed by consultants commissioned by the private sector, it was found that payroll tax at six percent would be the most beneficial form of new taxation as far as the impact on tourism is concerned, while a VAT was projected to slow the economy more in the short term and cause a greater inflationary spike. Ultimately both taxes were found to have a similar effect on growth and debt reduction in the long term and the government stated that studies it had reviewed showed VAT to be the most preferable form of taxation for the country.

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