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2004-02-03 17:28:18

The Nassau Institute Challenges Proposed VAT

The Nassau Institute an organisation devoted to libertarian ideas, is challenging the wisdom of doing away with the present tax system as embodied in Custom Duties and the Stamp Tax.

According to the Nassau Institute, the proposed Value Added Tax (VAT) will in fact transfer money from the private to the public sector with significant implications for employment.

In a recent statement, Minister of State for Finance Senator James Smith has said that the VAT will in fact be beneficial to the consumer by reducing the cost of living. Not everyone agrees.

In an earlier interview with the Journal, Eddy Laing, president of the Bahamas Light Industry Development Council and owner of the manufacturing company, Bahamas Box Limited, said that he could not imagine a tax system that would reduce the government's revenues.

“The government would not bring in a system that would reduce its revenues," Mr. Laing said. “If you move the tax from the border and put it elsewhere it is still a tax and the consumer is still paying."

Mr. Laing's position is echoed by businessman Rick Lowe, operations manager at Nassau Motors Company Limited and also a member of the Nassau Institute. In an interview with the Journal Sunday, he said that from the Institute's preliminary investigations, the VAT would decrease private sector profits and increase public sector revenues and thus violate the principle of economic neutrality, namely, it should not attempt to re-distribute income from one group to another.

“People do not go into business to create jobs and pay taxes to government," Mr. Lowe explained. “Businesses exist to create profits. The Journal does not exist so that you can have a job. Jobs are what happens when businesses make a profit."

Mr. Lowe said that if the VAT decreases private sector profits then businesses would have to find ways to make money and part of that includes becoming more efficient.

“When my profits decrease, I have to cut staff or when staff retires I do not replace them," he said. “But that is what a business does. People sometimes think of business as heartless and there are heartless people in business just as there are heartless employees, but you have to find ways of increasing profits and from the table you see that VAT will cut profits."

Mr. Lowe's argument about efficiency is supported by the present US recovery. Despite the turnaround in the economy, the expected jobs have not been created. One of the reasons for the lack of new jobs is that businesses have found ways to become more efficient particularly by getting greater productivity from present employment levels.

Contrary to what the government has been saying about the present tax system, namely that it is regressive, the Institute says that it in fact acts as a brake on government spending.

The Institute maintains that the present system of tariffs on imports “helps to control government spending by limiting the level of taxation to what consumers require."

The Institute argues that only a VAT rate that is constitutionally established will be able to prevent the government from increasing “ the level of taxation" it may impose.

According to the Institute, what happens under the present system is that economic downturns reduce revenues and “theoretically the government is forced to cut back on spending just as the population has to."

For example, shortly after taking office the current administration declared a moratorium on public service hiring because it did not have the revenues to expand its payroll. Similarly, capital expenditures such as major road works had to be postponed, particularly since the Ministry of Finance is attempting to be fiscally responsible and prudent, spending no more than it has to.

Mr. Lowe does not see the VAT system, as presented, providing that necessary incentive for the government to become fiscally responsible.

“The present proposal of taxing goods and services means that even if the car prices drop, and it isn't certain they will, the consumer will now have to pay at least 20 percent for services," Mr. Lowe said. “The experts tell us that it will take a VAT of around 22 percent for the government to match the revenue it receives from the present system."

He also referred to the less onerous weight of a VAT increase as opposed to a an increase on a dutiable item.

“Because it is across a wider set of goods and services a one percent increase in VAT will not seem as big as a 5 percent increase in import duty on cars," he explained.

Though he did not know what services would be taxed, Mr. Lowe said the tax on services could be viewed as a gratuity.

“So when you go to your lawyer or your barber you will now have to pay an extra 20 percent, the same way you pay a 15 percent gratuity in a restaurant."

Asked if he thought the government would source out many of its services under a VAT tax, Mr. Lowe said the problem with governments is that it is hard for them to curb their spending. Referring to the Regan administration, Mr. Lowe said they introduced a flat tax which greatly increased the US government's revenues but they also spent too, he observed “just as Bush is now doing."

Mr. Lowe believes that a fundamental problem is that governments believe that they should be in as many areas as possible beyond the constitutionally mandated “peace, order and good government".

“Governments get into areas that they should not be getting into," he said. “Back in the 40s the government decided to get into education because they thought that was something they could do The evidence so far is that private schools do a better job than the public schools. I hope they do source out some of the services they now provide."

The International Monetary Fund (IMF) has long been championing governments' exit from areas of the economy that can better be serviced by the private sector.

During the 1990s the government out sourced areas of waste collection and begun the yet to be completed privatisation of Bahamas Telecommunications Company Limited.

Mr. Lowe suggested that the introduction of a 'new tax system' was an opportunity for reforming the way the country functions. He spoke of the “code of silence" that he said presently shrouds discourse on important issues.

“Don't you think the FNM knew about all these changes that were coming?" he asked. “But no one says anything about it. I was on a commission that made a report to the government but we don't speak publicly about it. We know of people who are negotiating on behalf of the government but no one knows what they are doing or what has been decided! There is a code of silence in this country."

C.E. Huggins, The Bahama Journal 

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