Former Minister: Government Shouldn’t ‘Delegate’ Tax Decision

Monday, 26 May 2014 07:16 News Editor
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A former minister of state for finance has argued that the government must not “delegate to interest groups” the decision it must quickly make on tax reform for the country.
Calling economic models such as that produced for the Coalition for Responsible Taxation a “useful guide”, James Smith, president of CFAL and former central bank governor, said that they are “not substitutes” for the judgment of those with years of “practical experience” in guiding the local economy.

Asked to comment on the findings of the study produced by U.K.-based forecasting firm, Oxford Economics, for local private sector group, the Coalition for Responsible Taxation, Smith said: “It is important to note that, at best, the economic models are a useful guide in examining how different parts of the economy interact and react to different impulses based on various assumptions; they are not substitutes for good judgment based on familiarity and years of practical experience directing a local economy.

“What I think is important in the Bahamian context is the recognition that past years of excessive deficit spending has brought public finances to a critical juncture that calls for immediate and significant policy reforms to bring the national debt to manageable levels and set it on a path that would ensure economic sustainability,” said Smith.

Noting that the government has received “extensive” technical advice on the matter of tax reform and should “rely on all sources to determine the way forward”, Smith added that the government should not be expected to outsource its final decision in this regard.

“Ultimately, it is the government alone that has to make the choice that it feels would be in the best interest of the majority of its citizens; that choice cannot be delegated to other interest groups,” said Smith.

The Coalition for Responsible Taxation provided to the media and to the government this week a copy of the report produced by Oxford Economics on value-added tax and certain alternatives likely impact the local economy based on a variety of assumptions.

The report, which was compiled using data provided by the government and other sources, is to be followed this week by the coalition’s official position on which tax option it views as best for the country, based on the findings of the study which they commissioned.

Prime Minister Perry Christie has said that he would wait for the findings of the study before making any final decisions on tax reform.

Among the finding’s of the coalition’s report are that all of the tax and government spending scenarios they looked at – ranging from VAT at 7.5, 10 or 15 percent, to payroll tax at six or 12 percent – would have a broadly similar impact on the major economic indicators over a 10 year period. This is with the exception of VAT at 10 percent with the currently proposed list of exemptions, which would fail to curtail the rising national debt level.

It was also suggested that without significant control of government expenditure in addition to new tax measures, deficit and debt reduction targets would not be met.

In the short term, however, the findings were more varied, pointing to “winners and losers” under each scenario and the trade-offs the government may have to make in this regard. Payroll tax at six percent was found to be the best at promoting growth and competitiveness in the tourism sector, the country’s primary industry, while it would leave household incomes and employment levels worse off.

VAT would cause an inflationary “spike” in the short term, while payroll tax would have a less inflationary impact.

Still to be released are the findings of a report commissioned earlier this year by the Bahamas Hotel and Tourism Association on VAT and possible tax alternatives, conducted by Ernst and Young, and a study by U.S. economists paid for by the government.

Comparing the findings of the Oxford Economics study and that of the Inter-American Development Bank study on VAT’s likely impact on the economy, produced last year and used as evidence by the government that VAT was the right policy choice, Smith said: “The Oxford conclusions are similar to those arrived at in the IDB study, which generally stated that the VAT was the preferred tax for the Bahamian economy at this time if applied at the appropriate rate. Moreover, some inflationary effects should occur in the early years, tapering off and followed by positive economic growth. The convergence of the two reports is not surprising since the methodologies were similar (involving the use of general equilibrium models) and utilized the same data set from the Central Bank, Department of Statistics and other International Agencies.

“Having said that, it might be useful to note that the IDB study uses 1,600 equations versus 258 for Oxford and in addition to showing the effects on output, employment, prices, government revenues and debt, IDB measures the outcome of government policies on poverty and the distribution of income and expenditure across five quintiles of the population; Oxford, by its own admission, did not assess poverty and income distribution in its model,” he added.

The Oxford Economics study suggested that the government undertake further studies into the likely impact on income distribution of the various tax alternatives.

Alison Lowe,
The Nassau Guardian
Publsihed May 26, 2014