Has anyone modeled the effect of VAT on government cashflow. VAT on the costs of construction is reclaimable for hotels. In the Bahamas, when things are going well, there are often very large projects from time to time. VAT refunds on the construction costs are likely to create sudden cashflow shocks when the government is faced with refunding the VAT that could be in the 100's of millions range. This VAT will only start coming back as the hotels start trading and will not come back to government for many years.

VAT could cause some serious revenue instability issues that would not ordinarily be apparent in larger economies.

Exempting items will not have the effect of preventing price increases. This is because the overhead costs of transportation, storage and so on are subject to VAT that is not reclaimable. The VAT inevitably must be passed through to the customer even though it is not explicit on the invoice or bill.

There is no case to date where price controls have had any positive effect. The only effective control of prices is competition. It is purely a political gimmick falsely used to give the impression that prices will not rise.

Creating exemptions in VAT makes it extremely difficult to administer and enforce. The only viable option is to "zero-rate" items. This means that the VAT on overheads is reclaimable. While this would solve the issue that prices would need to rise on exempt items and the complications of accounting for exempt products; it would mean that VAT would have too collect the revenue elsewhere on non zero-rated items. Revenue does not come from thin air, the whole point of the exercise is to raise more revenue.

As Dr. Brash rightly pointed out zero rating items will create more benefit for the wealthier person than the poorer person because wealthier persons spend more. It is also wise to point out that wealthier individuals save more money and spend more overseas so they pay much less VAT as a relative proportion of their income. This is what makes VAT a very regressive tax.

The only established way of offsetting the regressive nature of VAT is to have income tax thresholds (but there is no income tax) or social benefit payments to the lower income sector through mechanisms such as child support benefits and so on.

I hope everyone realizes the most of the government claims on VAT are not factually correct. They are more designed to persuade people that VAT is good with little regard for the true facts. You will find that no government official has been or will be prepared to answer questions in an open debate (such as on radio or TV). They will only campaign for VAT on sound bites, press releases and web sites where they are in control of the message and the do not have to answer awkward questions. That says it all.

In the Bahamas case, the gain in production efficiency, that forms the economic basis for the introduction of VAT, does not exist. In the Bahamas circumstances, where there is no significant home production and no potential to develop home production on a significant scale, the efficiency gains that offsets the gain in public revenue are not there. The effect therefore is simply a gain in revenue with natural consequence of shrinking the economy. It is all deadweight loss with no benefit. For this central VAT benefit, many stages of production or distribution are a necessary requirement.

“All else equal, the potential revenue gain in moving from a tariff to a VAT is thus likely to be greater the higher consumption is relative to imports.”

“On this account, the advantage of VAT over a broad-based tariff is indeed likely to be less in smaller economies.”

“Taking as a benchmark the case in which it is desirable to tax all goods at the same rate, one key consideration will be the breakdown of final consumption between imports and domestically produced items. If much final consumption is imported, then a broad-based tariff will function in large part as a broad-based consumption tax. In so far as small economies would be expected to be relatively undiversified in their production, much of their consumption is likely to be imported.”

“On balance, there are grounds for presuming that the gain in moving to a VAT from a broad-based tariff will be less in smaller economies, both because the probable widening of the tax base is likely to be less and because more consumption is likely to be caught, in any event, under the tariff.”

“Fixed collection costs may be a particular concern in small economies. As discussed in Chapter 5, there is strong evidence that there are substantial fixed elements in complying with the VAT, which consequently bears more heavily on smaller firms. Insofar as the average size of firms above the appropriate VAT threshold tends to be smaller in smaller economies—which one might expect to be the case—so collection costs will consequently be more burdensome. Presumably there are fixed components to tariff collection costs too.”

“When there are few stages in domestic production, the VAT may offer little gain over a retail sales tax or broad- based tariff.”

“It is appropriate to temper general support for the introduction of a VAT into smaller economies with a note of caution. The gain is likely to be lower in such countries than elsewhere. In some cases, there may be little gain, or even a loss, relative to a broad-based tariff”

“the point needs to be made that in the absence of domestic production there is no economic difference between a consumption tax and a tariff.”

“Less tangible arguments—such as the wisdom of building a tax system suited for a more sophisticated future— are important, but do not reduce the value of simple calculations.”

Mr. Bain suggests that cogent arguments based on fact have no been presented by those that oppose VAT. I think that this is rather the pot calling the kettle black. His arguments in favour of VAT are both flaccid and misconceived. Therefore it is as well to put the real technical reasons against VAT on record so he may refer to them in future.

The much touted C-Efficiency ratio is presented as an indicator of the benefits of VAT in Small Island Nations. However, this is simply a measure of yield that is high as a function of the fact that most things are imported. It does not take into account that a similar calculation, on Customs Duty, yields the same if not better results. Rather than speak on my own behalf, I will let the words of Ebrill the former chief economist at the IMF speak for me. (There is some added explanation in italics without quotation marks that I have added)


“This general strong performance does not imply, however, that the VAT is an especially appropriate tax for these economies.”

“These empirical results relate only to the yield of the VAT. It is also important to look to collection costs, again relative to those of other taxes.” … “It may be that other taxes would also prove good revenue raisers in these economies.”


“Both considerations point to the need to make comparisons with other taxes.”


“For many small economies, however, leading alternatives include a broad-based tariff”

“In practice, however, there are collection costs to be weighed against this gain.” “It is easy to show (see Appendix III) that there are three effects to consider:

• The change in public revenues. Since tax and tariff revenues are simply transfers from public to private sector, this revenue effect should be valued at the marginal efficiency cost of raising revenue; that is, the amount by which the social value of $1 of tax revenue exceeds $1.

• The change in the deadweight loss that arises from distorting the prices that consumers face away from those at which products must be traded on the world market.


• The gain in production efficiency from aligning the prices faced by producers with those on world markets. Tariffs on intermediate products, for example, will induce domestic manufacturers to substitute away from those intermediates, implying production techniques which, valued at the world prices that ultimately determine the opportunities open to the economy, are less efficient than they might be.”

Not only is the premise that VAT will improve nonexistent exports ridiculous, but the expected effect of VAT assisting exports has proven to be false.

Empirical data has shown a reduced export performance in all Caribbean jurisdictions that have introduced VAT. There are a number of leading peer reviewed papers puzzling over why this has proven to be the case against expectations. A number of theories have been put forward but the main point to take away from this, is this assertion has proven to be false.

In addition, the IDB stands to gain a great deal if borrowing restrictions are lifted (by the introduction of VAT). They will be lending the Bahamian government money at a handsome return. So be aware that this is not the altruistic organization that you may be given to believe... they are there to collect your hard earned tax dollars for profit.

It is the same old story. cartac, imf, World Bank etc. all faceless nameless and with confidential or incomplete or non existent studies trying to impose their own policies on small countries without regard to the democratic wishes of the people. The suggestion that it is in the peoples best interests is unsupported by evidence or data.

The experience of other jurisdictions in the Caribbean has been far from conclusive. There are many factors that should be considered beyond whether a tax instrument is capable of raising large amounts of revenue. The economic impact and costs of implementation, together with the administrative cost of operating such a system are chief among those considerations.

The so called C-efficiency of VAT in the Caribbean is often bandied about as an indicator desirability. However, those people that use this as a positive benefit are either, trying to be deceptive, or are just plain ignorant of what the C-efficiency measures.

C-efficiency Ratio: the ratio of VAT revenue to consumption, divided by the standard tax rate. This measure seeks to avoid the problems encountered in the efficiency ratio, since consumption is a more appropriate VAT base than GDP.

However, in the case of jurisdictions that import a great deal if not all that they consume the C-efficiency ratio will automatically be high. This is because in the region of 70% of VAT is collected at the border as the goods are imported. In those circumstances it begs the question whether the expense of implementing and administering VAT could ever be worth it, being that only around 30% of the revenue is collected domestically. This 30% is unlikely to even cover the costs of collection. Serious thought has to be given as to whether import duty is far cheaper and more efficient in comparison to VAT as a tax instrument.

There is no doubt that VAT is an effective tax in larger jurisdictions with substantial home production. However, there is mounting evidence that it is unsuitable for small island jurisdictions with little or no home production or distribution. This is all provided there is no economic benefit in joining the WTO and reducing duty and trade barriers accordingly. However, in a jurisdiction that produces and export little it is difficult to see what advantages could be had from joining caricom's free market and the WTO. It would only encourage imports that would be now taxed on an equal footing with home production; effectively destroying what little home production there is at a stroke.

Bahamas it is your choice, speak up or forever hold your peace. I was central in the campaign against VAT in the TCI. Frankly, I would like nothing better than the Bahamas to adopt VAT it would leave the TCI in a much stronger position, but it would be your downfall.

I couldn't agree more. The reason that VAT is being proposed is that it is IMF policy. The IMF have attached the condition of VAT in order to obtain additional borrowing.

If the Bahamian government want to borrow more money, and it appears that they do, they have to comply.

There are serious doubts as to whether it would be wise to borrow more money; the Bahamas has one of the lowest debt to GDP levels in the region. Borrowing will place the Bahamas in a similar position to Barbados, SKN, Jamaica, St Lucia and so on. All have introduced VAT at the behest of the IMF and all have dangerously high public debt.

VAT is highly unsuitable for the Bahamas due to its high administration costs, and lack of home production and exports. Other tax instruments are for more effective than VAT for this type of economy.

The Bahamas does have significant problems because it collects such a low revenue to GDP. There are significant question that need to be asked to establish why the revenue level is so low. There is no doubt that the level of tax revenue to GDP should be increased from less than 20% to nearer 25% but VAT is the worst way of achieving this.

I was closely involved in the campaign against VAT in the Turks & Caicos. I hope all Bahamians fully realise the inherent dangers of implementing VAT. It would be disastrous.

VAT will not happen if it is clear that the party implementing it will be voted out at the first opportunity. If you do not think VAT will be of any benefit to the the Bahamas, make it clear that it will force you to vote for a party that will repeal it.

It is up to you.

My opinion is that it will not be beneficial... but I am in the TCI and do not have the same level of economic knowledge about the Bahamas. Nonetheless there seem to be a number of similarities that would appear to make VAT a foolhardy choice.

My advice is to demand proof of tangible benefits to the Bahamian economy... most of the claimed benefits are boilerplate that would only be true in larger economies.

Some of the bogus claims are as follows:

Tax simplification - VAT is a complex tax compared with property tax or import duty.

Self enforcing- VAT is only self inforcing with many stages of production... mostly not applicable to the Bahamas.

Efficiency - VAT is not as efficient as import duty or property tax... the high C-efficiency that is quoted for small island economies is totally misleading because it is a directly atributable to a high level of imports versus exports and does not indicate that the performance is especially good.

VAT is not regresssive - VAT is on of the most regressive taxes. If there is income tax, the tax burden on the poor can be alleviated by increased the tax thresholds. Without income tax there are few if any ways to make the tax system more progressive. Having VAT exemptions, or zero rating, does little to shift the tax burden from the poor. In reality these exemptions actually favour the rich in net terms because they generally consume more.

VAT improves international trade - All the empirical data so far has indicated that this expected effect has not materialised in practice, and the net effect of VAT is reduced international trade.

VAT is simple to administer - VAT is among the most complex taxes to administer along with income tax, corporation tax, turnover tax and tax withholding.

VAT is easy to enforce and collect - VAT has relatively low levels of compliance and high levels of fraud. It is much easier to collect in larger more sophisticated economies but even then there are serious difficulties.

This list is by no means exhaustive...

For clarity, VAT will not be introduced in the Turks & Caicos Island during the forseeable future. The UK, despite it's strong pro VAT stance, had to accept the weight of the arguments that were presented against it's introduction. Any attempt to introduce VAT in the TCI would have been clearly irrational and contrary to all economic logic or wisdom. This was not because there is anything wrong with VAT as a tax instrument, but because it is unsuitable for a small island economy with little or no home production that imports more than domestic consumption.

The questions that Bahamians need to ask are:

Given property tax, high duty rates etc. why is the revenue to GDP ration so low? It is less than 20%... the existing tax system seems to have an unusually poor performance.

Is there any benefit to the Bahamas from joining the WTO, trade liberalisation, or reduced duty rates? Wiill the increased tax on local production and service be detrimental to local business and open the door to cheaper imports etc. that will benefit from reduced tariffs?

Why is VAT being favoured over other tax measures? VAT is inherently complex, has significant compliance issues and high administrative cost on both the government and business side.

The improvements in efficiency that are attributed by economists to VAT are entirely as a result of "many stages of production or distribution". Tax is collected at each stage. If there are not many, or any, stages of production; most of the tax ends up being collected at the border (70%) leaving little to be collected domestically. In this case, it is not easy to justify the introduction of VAT since it broadly works as a more complex way to collect duty.

The only overiding reason to implement VAT over a duty model is trade liberalisation. In a country that imports almost everything and exports little; the benefits will not accrue domestically but benefit other countries that are trading partners.

It appears that VAT is being proposed principally because the IMF have recommended it. The IMF have made it clear that the introduction of VAT will open the way to addition public borrowing. The Bahamas has a very low dept to GDP level compared with other independent nations (although it is rising). It is questionable whether additional borrowing will improve the welfare of the Bahamas or damage the economy further.

The proposed introduction of VAT seems to be more to do with satisfying the policy goals of the IMF, World Bank and WTO than to benefit the economy of the Bahamas. It should only be introduced if it can be demonstrated that there will be clear economic benefits to the Bahamas.