A positive move

On Monday, former Prime Minister Owen Arthur addressed the monthly business luncheon of the Grand Bahama Chamber of Commerce on the topic “The Value Added Tax, its impact on the Bahamas: a Caribbean perspective”. In light of current economic situation in Barbados, we have decided to publish the full text of this address over the next few days in the hope it will stimulate discussion.

Following is the first instalment.

In my recent address, as part of the celebration of Bahamas’ 40th Anniversary of its Independence, I called attention to the fact that the environment within which the development of Caribbean societies takes place has been subject to dramatic transformation.

I further stated that countries which failed or showed themselves as being too slow to adapt to their changed environment run the risk of falling behind in the race to development, and, at worst, of becoming failed societies.

This address today draws upon that perspective in offering an opinion on the likely impact of the introduction of a Value Added Tax on the Commonwealth of the Bahamas.

While the focus will be on issues related to the possible impact of a Value Added Tax, it would seem that justice can only be done to this subject if it is discussed within the context of a broader and interrelated set of issues.

That context was set out with wonderful clarity in an article by A. Gabrielle Frasier at the 2001 Conference of the Caribbean Centre for Monetary Studies: Can the Sir Stafford Sands Model of the Bahamian Economy Survive Today’s Global Economy?

To be sure, the global economy within which Bahamas now has to operate is remarkably different from that which obtained when many of the structural and institutional characteristics which make up the Bahamian model were put in place in the late 1940s.

The Bahamas has now to find its way in a globalised economy which is governed, in large measure, by a body of international trade law which has been devised to give effect to a number of specific principles.

Among these is the principle that countries should as far as possible, reduce protection to domestic industries by reducing tariffs and removing other barriers to trade.

Another important principle is one that requires that tariffs and economic policies and regulations should be applied without discrimination among countries.

Of special interest to the Bahamas is the National Treatment rule in international trade law which prohibits the application of domestic taxes and regulations which discriminate between domestic and imported products and enterprise.

Such rules are now enforced and are enforceable by an international institution, the WTO, which has mechanisms for the settlement of disputes, and for the enforcement of penalties when countries are in breach of the rules.

Bahamas is the only country in the Western Hemisphere which is not a member of the WTO.

For a country whose economic activities and performance are influenced, to an extraordinary degree, by its participation in the global economic arena, it is inconceivable that the Bahamas will be able to indefinitely maintain this “odd man out” status where relating to a rules-based international economy is concerned.

The relevant issue therefore is not that as to whether Bahamas should become a member of the WTO. It is that as to how best the nation should prepare for and negotiate the terms of its participation in this critical institution, and how it should do so while giving equal priority to the other reforms that the forging of such a relationship with the global economy are sure to trigger.

The introduction and potential impact of a VAT in the Bahamas, have in, my judgement to be discussed in that broader context. It has to be viewed as an essential part of a broader suite of economic reforms which have to be implemented as a single, coherent undertaking.

In offering this broader framework, I do not seek to minimise the purely fiscal issues which have to addressed in the analysis of the proposal to introduce a Value Added Tax in the Bahamas.

In fact, the introduction of a Value Added Tax can be viewed as a necessary response to an evolving fiscal situation which derives from Bahamas’ special domestic circumstances.

This country has a very narrow tax base that allows it to compete effectively with territories in its immediate neighbourhood, which are still colonies of Britain, and which have economic structures similar to that of the Bahamas.

However, unlike them, the Bahamas is evolving a pattern of expenditure associated with its assumptions of all of the obligations of nationhood.

This is beginning to be reflected in the emergence of fiscal deficits, and the growth of the public debt. Although these at present are within international norms of acceptability, their projected trajectory is such that fiscal reform is required now to ensure that Bahamas does not eventually have to confront the kinds of fiscal challenges that are currently bedeviling so many of its neighbours in CARICOM.

This must constitute part of the rationale for fiscal reform, including a VAT in the Bahamas.

The introduction of a Value Added Tax in Bahamas, no matter how well intended or designed it is, will be sure to generate its own controversy largely because it will bring into the tax net activities that are not now such to indirect tax.

Indeed the 1774 statement of Edmund Burke continues to be true: “It is not given to men to tax and to please, no more than to love and to be wise.”

If I can however be allowed to draw from the Barbadian experience, I would judge that its successful introduction is not beyond the people of the Bahamas.

For a VAT was introduced in Barbados under more challenging circumstances that currently faces the Bahamas as you contemplate its introduction.

The VAT was introduced in 1997 at the same time as Barbados started to apply the programme of trade liberalization which had been agreed to when it acceded to membership of the WTO in 1994. Its introduction also coincided with the implementation of its obligations, as part of the CSME, to reduce its extra-regional tariffs from a high of 45 per cent to 20 per cent. It coincided with the OECD Harmful Tax Initiative threat to the functioning of our International Business and Financial Sector that helped to reduce the growth prospects of our economy.

Above all, the scale of fiscal adjustment that was intended to be accomplished by the move to a VAT by Barbados, far exceeded that now intended in the Bahamas. In Barbados, the VAT was used to replace 11 forms of indirect taxes, and 44 kinds of fees as a means of raising revenue.

Despite the challenges, the IMF’s publication, The Modern VAT, in evaluating the performance of the VAT in small countries, at page 168 cites Barbados as a success story.

On the face of it, the proposals set out in the Government of Bahamas’ White Paper “A VAT within a Reformed Tax System”, on balance suggests that this country is giving itself a reasonable change to successfully introduce a VAT.

Indeed the design features proposed for the VAT and the purposes it is intended to serve meet best standards and practices to be found in a VAT across the wide range of countries in which it is now the major form of taxation.

* To be continued tomorrow.

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