Thursday, May 22, 2014

...households would ultimately be better off with value-added tax (VAT) compared to payroll tax

VAT better than payroll tax, Oxford Economics finds

Guardian Staff Reporter

While the introduction of value-added tax (VAT) would slow the economy down and result in a “surge in inflation” in the short-term, households would ultimately be better off with VAT compared to payroll tax, according to a new study by Oxford Economics.

The Bahamas Chamber of Commerce and Employers Confederation (BCCEC) and the Coalition for Responsible Taxation commissioned the report.

The report, titled “An assessment of the macroeconomic implications of alternative strategies for deficit reduction in The Bahamas”, examined four models of VAT and two models of payroll tax over a 10-year forecast.

The government has said VAT, which was originally proposed to be introduced on July 1 at a rate of 15 percent, will be delayed and introduced at a lower rate, although the exact date or rate has not been announced.

Among the report’s key findings is that introducing VAT at a rate of 15 percent or 10 percent with a broad range of exemptions would result in inflation of over 6.5 percent in the first year VAT is introduced.

The report said all tax models examined have much smaller differences in growth in the economy in the long-term.

The models include: introducing VAT at a rate of 7.5 percent or 10 percent with a narrow range of exemptions; 10 percent or 15 percent with a broad range of exemptions and payroll tax at a rate of six percent or 12 percent where employees and employers shares the cost equally.

The report noted “all strategies for deficit reduction are estimated to have a broadly similar impact on the supply side capacity of the economy”.

However, the report said introducing VAT at a rate of 7.5 percent or 10 percent with a narrow range of exemptions would result in the highest long-term level of gross domestic product (GDP) growth.

The report also said those models would result in a “permanently lower” inflation rate.

The report admits that some assumptions had to be made regarding the future of The Bahamas’ fiscal policy, including changes in tax rates, the introduction of new taxes and government spending.

The report said introducing VAT at a rate of 15 percent or 10 percent with a broad range of exemptions is more preferable from an equity perspective, but indicated that it is not the most efficient way to address such concerns.

The report also indicated that broad exemptions would reduce the impact on lower income households, but that is a “second-best solution” because the benefits apply to everyone, irrespective of income.

If the government were to compensate directly lower-income households through means-tested personal transfers implemented, this would be a more efficient response to the distributional issues raised by the implementation of VAT, the report said.

In April, Deputy Prime Minister Philip Brave Davis said the government is considering implementing a compensation element to VAT to assist low-income families, similar to New Zealand.

Following the introduction of the goods and services tax (GST) in New Zealand, the government implemented a family tax support system that provided low-income families with wage supplements.

The cash transfer was determined by the size of the household, according to New Zealand VAT expert Don Brash.

No surprises

In an interview with The Nassau Guardian, BCCEC Chairman Robert Myers said the decisions the government makes based on the findings of the Oxford Economics report are critical.

Asked whether the report’s findings surprised him, Myers said, “No. It didn’t surprise us. The numbers that showed big increases to inflation, the reduced numbers of VAT, the payroll tax is actually quite efficient.

“But there are other external issues that impact that like the WTO (World Trade Organization).

“The question really becomes do we have a short-term tax and then a long-term tax, do we try and come to an agreement and fit something in that works in between.”

Myers, who is also the co-chair of the Coalition for Responsible Taxation, said the report was submitted to the government on Tuesday night.

He said the Chamber of Commerce will form a consensus before making its position public.

The chamber is expected to release its position paper on proposed tax alternatives sometime next week, Myers said.

He encouraged Bahamians to review the proposed solution models in the report and form their own opinion.

The report can be read on

May 22, 2014