Why Restructuring the Tax System is Imperative for the Fiscal Survival of The Bahamas

Rotarian Deno Moss and Senator Jerome Fitzgerald

On Thursday January 06, 2011 the Nassau Sunrise Rotary Club welcomed Senator the Honorable Jerome Fitzgerald as its guest speaker. Senator Fitzgerald shared with the Club his thoughts on why restructuring the tax system is imperative for the fiscal survival of The Bahamas.

A passionate believer in this process, Senator Fitzgerald believes that due to the recurring deficit of $400 million dollars over the past few years and the fact that the country has spent on average in excess of $1.3 billion more than it has received in revenue, is all the more reason to begin to engage the discussion and implement where necessary, new taxation methods that will eventually mitigate the huge deficit the country finds itself in.

If The Bahamas expects to continue to compete on the World stage with other countries in this hemisphere as well as with others globally in areas of IT, Education, Tourism, Financial Services and others, then it is imperative that we examine new ways to generate revenues that will offset our rapid spending habits. Spending models used by successive governments that have sought to borrow from international lending agencies during tough times, rather than seek to implement new benchmarks and best practices on revenue collections currently being utilized by our neighbors with a great deal of success.

A few of the new models worth exploring are the income tax model, the VAT Taxation model, double taxation model (which is very attractive to corporations doing business in the country) among others.

Senator Fitzgerald advanced several points that supported his position on this restructuring process:

Ø  “Since 2008 the Government has continued to raise taxes with 2008 being the largest across the board increase in recent memory and 2010 being the steepest increase in recent memory.”

Ø  “Still revenues fell well short of budget and expenditure outstripped revenue and we experienced record deficits.”

Ø  “Some may say it is poor management.   Yes there is an argument for that, some may say the money should have been spent on something different.  I may tend to agree with both but it does not address the fundamental question that our expenses are outstripping our revenues and we are not making adjustments.   The Government must lead by example.   Must be fiscally responsible.   Demands on Government have increased – education, health, social services and population increases.”

Ø  “The definition of insanity is to continue doing the same thing and expect a different result.   We must adjust our revenue model.   We must make some hard decisions.   We must level the playing field. I am not socialist.    I am a capitalist – not spreading wealth, or creating opportunity.”

Ø  “Our tax system is regressive and not progressive.  Proportionately those who can least afford it are carrying the burden of government revenue whether you make $100 of $1,000 you are paying the same tax.   Progressive is paying on a proportionate basis earn more pay more.”

Ø  “What has happened to Government has happened to the middle class.   Revenue has either remained constant or shrunk over the past 10 years and expenses have increased exponentially.  What has this done to the middle class – driven them back into the lower class – poverty.   It has happened quickly.  One day could not meet expenses.  The next had a deficit at the end of the month.  Single mother.”

                        These are the internal pressures.

Ø  At the same time, we are facing external pressures, particularly in relation to the second pillar of our economy – financial services.   “The stop tax haven Abuse Act” by Senator Obama.   But in April 2008 the G20 countries led by British PM Gordon put countries on the grey list that were not compliant with financial safeguards to protect against money laundering, tax evasion etc.

But they themselves had loose financial systems and they mandated that these countries sign 11 TIEA’s by May 2010 and extended to June 2010.   We have now signed 18.

Ø  What have we received for signing these 18, nothing apart from the US.   Well not exactly true, we received benefits from the US because US companies received exemptions of convention taxes if conventions were booked in The Bahamas.

Ø  So we are being pressed from both ends.  Internally we have a tax system that taxes goods and not services although services make up the majority of our economy and taxes on goods continue to increase and the main consumer of these goods are the poor and middle class.   Externally countries fighting for their tax dollars and are prepared to chase it all around they would destroy small economies if they have to.

What do we do and why?

Ø  I suggest that we must change our tax system to one which is a combination of income tax and sales tax or VAT.

The income tax must be progressive.   The person earning minimum wage should not pay income tax – a single mother who feeds 3,4,5 must be able to stretch her $175.00 further in the food store.   Duty on goods must be eliminated on certain goods.   The buying power of that same $175 is not $250.

Socially it has a significant impact.   Financially for businesses it has a tremendous impact effecting the cost of capital and cash flows, paying duty on an item before you sell it is crazy – sales tax on goods and services of 10-15%.

Externally – double taxation treaties with those same countries which allow us to tax a small percent on business profits of foreign companies resident and doing business in The Bahamas say 5-10 and they get to deduct it from their home taxes.  Otherwise they are operating for free.   The companies don’t care but we have nothing to bargain with, we have signed the TIEA.

Senator Fitzgerald concluded his discussion by challenging Rotarians present. He surmised that if we expect to see change, hard decisions will have to be made. He noted that since no decisions have been made for over 20 years, it become imperative that “we the people” seek to get involved. This involvement naturally will be manifested through our collective efforts and in our desire to challenge the very system of governance that we have grown accustomed to and comfortable with.