In part one of our series, we examined our current system of taxation, which essentially relies on the imposition of customs duties at the time goods are imported.

We also examined the concept of a sales tax, which is gaining support in some quarters of the United States as an alternative to a current unwieldy system of income taxes.

In part two, we examined the value added tax, which has been adopted by our neighbor to the south, Barbados.

In part three, we wrapped up our discussion of comparative taxation systems with a look at the most dreaded income tax (and its commonly discussed variant, the flat tax).

Today, in our final article, we offer our thoughts on the way forward.

As you can see from our previous articles in this series, migrating to a new system of taxation presents many challenges for The Bahamas, some real and some perceived. One of the most common concerns is whether or not we can put the necessary infrastructure in place to accommodate the various options, and more importantly – at what costs.

Transition issues

However, before we even get to the cost of changing tax systems, there are several philosophical questions we need to make determinations about.

Who should bear the tax burden? How broad should the tax base be? How do we dovetail the tax system into the fiscal system? Do we continue to rely on just targeting certain items such as consumption (as is the case with customs duties) or do we try to tax all goods and services (a VAT)? To what extent do we rearrange the tax burden? To what extent do we yield to special interest groups, if at all?

To be honest, if we had a more developed system of public opinion and more entrenched civil society organisations , the public would be demanding to know the position of the government of the day and the major opposition groupings on the above questions? On something as fundamental as tax reform, incumbent policy makers and policy makers to be should be more involved. In building a nation, those two constituencies ought to be taking more of a leadership position. Leadership requires rolling up one's sleeves and taking on difficult tasks. Docility cannot and must not be the order of the day!

The rate of taxation needs to be driven by how much the country need to service the legitimate needs of the public system. We need to stop the charade of separating the recurrent budget from the capital budget, in terms of calculating the budget deficit as both need to be funded.

Why are governments reluctant to take on tax reform?

Firstly, tax reform calls for the rearrangement of the tax burden (who pays), which is a politically explosive issue. Secondly, governments tend to capitulate to special interests groups. Thirdly, tax reform often results in the extension of taxation into areas that have either been under-taxed or simply not taxed at all. Fourthly, the more categories you exclude from taxation (special interest groups), the higher the tax rates have to be on the remaining items. Finally, governments have great difficulties balancing the demands of the masses (electors of governments) for greater social or free benefits against the special interest of the rich (financiers of political organisations) who do not wish to pay any taxes.

The way forward

We had hoped to do some revenue projections under the various alternative tax systems. However, this was not possible due the lack of availability of reliable data and the natural reluctance of public officers to share the little data available. Until this situation changes, there will be little meaningful independent analysis done in this regard.

In the past, finance officials have indicated that they are leaning more towards some variation of a VAT tax. On Oct. 20, both daily newspapers carried a story quoting the minister of trade saying he felt that income tax was the fairest of all options.

This was followed three days later, when the minister of state for finance, speaking at a Chamber of Commerce luncheon, revealed that the preponderance of technical advice received by his ministry favored a VAT tax to replace customs duty and stamp tax. He indicated that from a policy standpoint - sales tax, income tax and payroll tax (because of its similarity to income tax) were all off the table.

He further revealed that a recommended tax range could be between 10-20 per cent and that exports/education/health/financial services and small businesses with turnover under $50,000 per annum could be exempt.

We feel that the National Insurance collection system is fairly efficient for employed people but grossly deficient for self-employed people as the collection rate for the self employed is believed to be well below 50 per cent.

To start the discussion, we believe The Bahamas may be best served by a combination of a low flat tax on personal and corporate income and a sales tax. The relative rates of each component will have to be determined after the desired revenue numbers are modeled against the country's demographics. However, we caution that our final position is subject to our own analysis of the relevant data. The collection of a VAT tax is complicated and a quantum leap forward compared to what Bahamians are accustomed to.

We are told that the IMF has consultants at the ministry of finance as we write, helping the minister of finance in this regard.

We challenge the government to make relevant data available to enable sound and robust independent analysis to take place. We further challenge the government to involve private research organisations in this regard. Given recent experience, we suspect that a tax reform commission will be contemplated. All we ask is that competent people with relevant expertise are appointed as this is one issue that we need to get right the first time.

This in our humble opinion is not a matter for partisan politics.

Let the discussion begin!

Until next week...

The views expressed in this article are those of the authors and do not necessarily reflect the views of Colina Financial Advisors Ltd. Please direct your comments or questions to info@ colinafinancial.com or call us at 502-7010.

Posted: Tuesday November 18, 2003