On VAT amendment bill

Dear Editor,

Faced with the prospect that an ill-advised but key campaign promise could result in an almost 16 percent reduction in VAT revenue, the government not only decided to go full steam ahead but to do so on the backs of the less affluent. Its rationale? Dogma is more real than what one sees.

Government’s decision to impose 10 percent VAT on breadbasket items and a number of pharmaceuticals is wrong. Here are six reasons:

*It will make VAT more regressive. It is accepted that in an environment where there is a flat VAT rate, VAT is unfairly weighty on the poor because a higher percentage of their income goes towards consumption, which is taxed. Realizing that inequity, the FNM administration eliminated VAT on items that people of lesser means would purchase a greater percentage of. That was a way of making the tax burden less regressive.

*The tax increase on the poor is being done by statute but its offset is by political sentiment. The government is about to enact legislation that would impose more taxes on those least able to afford it, while arguing that the same will be addressed by the benevolence of unpredictable politicians.

*Its effect is taxpayer subsidization of tax reduction to the rich. The effect of the government’s stated policy to increase taxes on the backs of the poor and to give them direct payments is, in this instance, at best a clear and unjustifiable attempt to do 2 things: 1. Give the richer an unnecessary tax break; and 2. To subsidize it with taxpayer money. According to a rating agency, the effect of the tax increase and reduction will be revenue neutral. That is to say that when it is all said and done, on an aggregate basis the VAT lost from the 2 percent reduction will equal the VAT gained from the 10 percent increase. Now, by their own admission, the poor will pay more in VAT hence the need for direct payments. Since the poorer will pay more and the aggregate will not change, it must mean that the richer will pay less. And in trying to compensate the poorer for this unrequested gift to the richer, the government will use taxpayer money to make payments to the poorer. In effect therefore, taxpayers will subsidize a tax break to the richer.

*The policy lacks consistency. There is no consistency in the government’s position. The government should reconcile its VAT position with its position on price control. Does the government support the existence of breadbasket items, in the first place, as a means to assist low-income families to enjoy a minimum standard of living? If the Government supports zero duty on such items, why would it not support zero VAT? Or could it be that by increasing VAT on those items, the Government is forecasting its intention to get rid of the breadbasket list, zero duty and price control? I doubt that, but the question needs to be asked. The rationale for the existence of breadbasket items that enjoy low duty is the same as that for zero rated VAT on those products.

*Lump sump payment during Christmas does not solve the problem. While many will find a good use for those funds, it is implausible to expect that most who find it hard to make ends meet regularly, will have the discipline to deploy those funds over a period of months and not just during the festive season. Moreover, the cost incurred to administer cash transfers and the likely political mischief it will create must also be factored.

The negative effect of the removal of transshipment activities from zero-rated and reverting those activities to exempt. Grand Bahama’s core industrial sector could be made less competitive as they will not be able to recover the VAT paid to produce services rendered even though such services are for export.

I have no doubt that there are voices in Government that believe what they are doing is right. No doubt, those voices are more compelling when faced with the prospect of having to reverse a bad promise. The political way to get out of this is to wrap it up in a far-reaching poverty alleviation program.

– Lindon Nairn

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