By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister yesterday slammed the private sector’s payroll tax proposal as “disastrous” for job creation, suggesting the Government would require a rate higher than 5 per cent.

Michael Halkitis, minister of state for finance, suggested a payroll tax would result in “higher prices and lower profit margins” for Bahamian businesses, while also fail to catch the thousands of Bahamians working in the informal economy.

Kicking off the Mid-Year Budget debate in the House of Assembly, Mr Halkitis indicated that the administrative and filing requirements associated with an income tax would make it, also, too costly to be a Value-Added Tax (VAT) alternative.

He conceded, though, that any form of new taxation would have some negative impact on the Bahamian economy and consumer.

“A new payroll tax has been suggested as a possible replacement for VAT,” Mr Halkitis said. “The first concern is that it’s a tax on jobs, and if not passed on to employees in the form of wages, inevitably leads to higher prices and lower profit margins.”

The Minister then suggested that another weakness of a payroll tax would be its failure to catch hundreds, if not thousands, of Bahamians who worked in the informal economy and were paid in cash.

Noting the problems this posed the National Insurance Board (NIB) when it came to collecting due contributions from self-employed persons, Mr Halkitis said: “A tremendous amount of people operate in the informal economy, and are paid in cash.”

The private sector’s Coalition for Responsible Taxation has proposed a 5 per cent payroll tax as its main alternative, believing NIB’s existing collection infrastructure would make it less costly to administer than VAT.

The payroll tax’s other plus, in the eyes of businesses, is that its implementation will likely lead to lower operations expense and cost/price rises than VAT.

Gowon Bowe, the Coalition’s co-chair, has previously estimated that a 5 per cent payroll tax will generate $190 million in extra government revenues annually.

This, the Coalition pointed out, would match the net $200 million increase the Government is projecting to earn from VAT - largely through catching services in the tax net for the first time.

Mr Halkitis, though, indicated that a 5 per cent payroll tax would not come close to matching the forecast $500 million in gross revenues that VAT will produce.

“There’s also the question of a new payroll tax generating the revenues necessary for the Government to achieve its targets,” he said.

A 5 per cent rate, the minister of finance said, would produce “half of the revenues we expect from VAT”. The extra $300 million from VAT is intended to replace monies foregone by simultaneous reductions in Excise Tax and import duty rates.

“A higher payroll tax [rate] would likely be required,” Mr Halkitis said. “That, in turn, would be disastrous in terms of the goal of generating new employment.”

Other payroll tax critics have warned that it would also fail to catch high net worth individuals who, while not drawing wages or salaries, earned the bulk of their income from share dividends and the like.

And they also pointed out that there would be significant ‘carve outs’ and exemptions for lower income earners under a payroll tax.

Mr Halkitis, meanwhile, questioned whether Bahamians, under both a payroll and income tax, would find its acceptable to have money taken from their earnings “at the beginning” - before it even got into their hands.

An income tax, he added, would require individuals and companies to file annual tax returns to the Government disclosing all their wage/salary; interest; capital gains; rental; and stocks and dividends income.

Mr Halkitis suggested that an income tax would impose a more expensive administrative burden on the Government, noting that 15,000 companies currently held Business Licences.

All these would be required to file income tax returns, compared to the estimated 4,000 business that will become mandatory registrants under VAT.

The Minister added that income tax rates of 25-30 per cent were not uncommon in many countries, and added: “The rate of personal income tax needs to be set at a sufficiently high level to achieve the revenue goals.

“Would the working Bahamian prefer to see 30 per cent of their income deducted from their monthly pay cheque, or would they prefer to have full liberty of choice over what products or services they purchase, knowing some are subject to VAT and others are exempt.”

Mr Halkitis agreed, though, that Bahamians would experience a negative impact regardless of what tax reform option was ultimately chosen by the Government.

“There’s no question any increase in taxation could dampen demand in the economy, but that’s the concern with any form of taxation, be it a payroll tax, a sales tax, an income tax or a corporate income tax,” he added.

Mr Halkitis said studies had shown that taxes on immovable property transactions were best when it came to stimulating economic growth, but these would not generate sufficient revenues for the Bahamas.

The second best option, the Minister added, was VAT, followed by income taxes.

Mr Halkitis’s Mid-Year Budget address largely focused on the Government’s revenue needs, and there was little to no mention about any spending cuts or restraint.

However, the Minister did give a nod to improve the Bahamas’ economic competitiveness, and efficiency and productivity to improve the ease of doing business, arguing that VAT would help this process.

“We need more people working, increased productivity,” he said. “We need more capital at work, and need more technology and productivity.”

VAT, Mr Halkitis said, would aid this by taxing consumption, rather than savings and investment. In so doing, tax reform would foster entrepreneurship.

““By stimulating savings and investment, we believe VAT leads to higher savings and improved productivity,” Mr Halkitis said.