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Wednesday, April 14, 2010

The Bahamas needs tax and spending reform!

I was listening to the news just recently, where Prime Minister Hubert Ingraham, who also is the Minister of Finance, said something to the effect that he would not lean against anyone broaching the issue of taxing the illegal numbers racket in The Bahamas, by virtue of taxing the Internet Cafe's that are reportedly "front's" for internet gambling businesses.

However, I'm not quite sure how easy it is to tax the numbers racket through Internet Cafe's in The Bahamas? For starters, you have to have them recognize that they are, in fact, running illegal gambling out of Internet Cafe's- considering that the authorities have not been able to produce solid evidence in order to prosecute anyone allegedly gambling in these establishments.

Secondly, what about the Internet Cafe's that are legitimate Internet Cafe's? Can't tax them...can you?!? Lastly, if I am running an illegal gambling racket through an Internet Cafe; then why would I want to pay taxes to the government for something I have been getting away with for so long?

Even if you put the work out for companies to bid on a national lottery, you still would be left at square one with the Internet Cafe's that run the numbers racket and their subsequent prosecution.

It is no easy task and good luck to the persons tasked with sorting it out.

More importantly, however, if we have come to a point where we are speaking in open forum about taxing the numbers racket, seriously, it signifies that the government feels that The Bahamas is at a juncture where it needs meaningful tax reform for government revenue; the government, clearly, is not generating enough internal revenue in order to meet its obligations now; and that the prospects of meeting the debt service, is very bleak with the current system of taxation.

To be very blunt: the government has to tax. However, the term "tax reform” isn't necessarily supposed to have a negative connotation or stand for a pejorative slight of hand.

The word "tax", does evoke personal sentiments for obvious reasons and the word "reform"- especially used by politicians- is a code word of sorts for the refocusing of entitlements and simultaneously as a buzz word for business persons, which signifies more and unnecessary regulation. Which to business persons, means more time away from their business and more time dealing with a governmental agency with mentally challenged employees.

To be fair, government employee's aren't mentally challenged- although some who look like they shouldn't be makes one wonder- and everyone doesn't understand what reform signifies- either which way- and no one wants to pay more taxes.

The truth is however, The Bahamas government is in debt to over 40 percent of GDP- with a widening deficit. Another clear fact is that the Bahamas doesn't have any streams of government revenue, other than from import taxes (where it gets over 50% of its revenue), National Insurance contributions, revenue from public corporations and government agencies and also through forms of public service charges and real estate; i.e., vehicle registration and real property tax.

Conversely, the Bahamas's tax to GDP ratio is about 18 percent. Which isn't that bad, considering Barbados, Jamaica and Trinidad is at 32, 27 and 38 percent respectively. But, The Bahamas isn't just like any other Caribbean country- we do things a little different.

Firstly, we don't produce many agricultural products for mass consumption in The Bahamas, neither do we have a large export sector in terms of persons involved in exportation, away from the concentrated profits some firms make.

Another concern that compounds the lack of efficient and beneficial dynamism in the market place as it relates to an optimal and targeted tax mix is the reliance of import tariffs for government revenue.

While The Bahamas does not produce over 80% of what it consumes, and with the tax system as basic as it is, it has to tax imports heavily. As a consequence, this puts consumers and more importantly, low income consumer, at a disadvantage as the tax burden is disproportionate to what they spend on taxes in relation to what larger corporations and high income earners pay. For example, a 50 percent flat tax on all consumer goods means more to someone who makes 20k per year than someone who makes 100k per year and a flat rate for business licenses, means more to the small business person than it does for a large corporation.

Moreover, large industries such as banking and shipping, are virtually untouched as it relates to taxation- no capital gains or corporate tax. Even the exportation of fisheries products is untouched as they relate to export taxes.

Some may argue that these low taxes are the reason why these industries are so dynamic and successful. However, there is more to a successful enterprise than just low taxation- location, barriers to entry and diversification, comparative and competitive advantages, come first and foremost for a successful enterprise.

More importantly, inequitable or no taxation, can be more destructive than high taxation. For political reasons, the need to keep such high-end entitlements incentivises corruption. Also, with regard to adequate funding for social programmes, persons wishing to engage in such specialised enterprises, face high entry costs that the consumer and subsequently the state ultimately must pay for.

Those additional barriers, decreases the tax base as persons begin to spend more of their disposable income in an effort to obtain the training and skills necessary to compete in and for what the marketplace offers, in addition to the high cost of private investment into such specialised enterprises.

What makes it worse is if the perception of risk through sacrifice made by individuals does not facilitate for the full cycle completion on endeavours. Or, the high cost for entry is private market based (cost for capital investment and cost for private education), where the government does not have a progressive, optimal tax mix and that tax mix model, is not synergised to assist with the equitable development of the industry at all levels.

When such market failures occur, the government must spend on socio-economic policies that develop infrastructure and human capital.

Through all of this, I must state that the issues are more complex than just taxation. We need more bang for the buck and a re-engineering of our socio-economic programmes, in addition to doing more with respect to meaningful tax and spend policies that encourages economic growth, as well as lowering the private and public entry barriers to enterprise and skills training.

Before we begin the discussions on what forms of taxation we should have- VAT, excise taxes, etc...- or what types of spending we must endeavour, we must begin to frame the mind of citizens and add to the conversation of what the economic importance of tax and spending reform is and what that means to us all, as I hoped this article addressed.
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