In the space of 24 hours I have read two independent articles that espouse the views I hold on the implementation of the Value-Added Tax (VAT) in the federation of St. Kitts and Nevis. The first, in two parts, is the articulation of celebrated Kittitian icon Mrs. Willa Franks-Liburd on the merits of the reintroduction of personal income tax and the second is a Jamaica Observer newspaper article which reports on the presentation of Former Jamaican Prime Minister, Percival James Patterson to CARICOM Heads on Monday this week.
Having read both has vindicated, in my mind at least, my positions on the VAT and the conditions best suited for its implementation.
I must for necessity put the caveat that I am and has always been an advocate for the implementation of VAT in St. Kitts-Nevis. It has been my belief that the present tax regime is too cumbersome and there are too many taxes and duties on imported goods that are by necessity calculated in the cost of procuring these goods to the detriment of the consumers. I however hold reservations against any VAT implementation until two matters have been addressed and clearly resolved.
The first is the reintroduction of Personal Income Tax.
A progressive Personal Income Tax as described by Mrs. Franks-Liburd in her recently published two-part discourse, A case for re-introduction of personal income tax in St. Kitts and Nevis, “does not seek to penalize those who excel or through their own efforts or otherwise earn high incomes, nor does it try to make their income after taxes equate with those of lower incomes.” What it does she contend is generate “government revenues in an equitable or fair manner, according to one’s ability to pay as reflected in one’s earnings.”
The abolition of personal income tax in this country was a political tool and may well have been an economic policy whose usefulness has run its course and now needs to be overhauled. It was in the February 1980 election campaign that the PAM party seeking government gained the popularity needed to win by pledging to abolish personal income tax.
Over the years we have instituted and increased the rates of a number of indirect taxes, levies and duties. I have listed as many as I could recall - social services levy, withholding tax, interest rent tax, environmental levy, vacation timeshare tax, island enhancement fund, public entertainment tax, proceeds from lotto tax, parcel tax, duty free shops tax, customer service charge, telephone tax, cable tv tax, insurance premium tax, stamp duty, fuel tax, and taxes infinitum.
This basket of indirect taxes has caused a greater portion of the income of ordinary folk to be paid in comparison to their more affluent neighbours. The contrast is that with all the savings that have resulted for the more prosperous and higher income earners there have not been significant local investments that initiate and drive economic growth.
Additionally, many of these taxes affect the prices of goods and services, further increasing the cost of living for the ordinary consumer who already pays more in taxes, as a percentage of his/her income.
The Central Bank reports continue to show that in St. Kitts-Nevis public sector spending is heavily depended on to drive the economy. The ECCB’s 2009 September Economic and Financial Review points to a correlation in a contraction in the GDP of St. Kitts-Nevis and the construction sector, that has lead the economy for years, citing that “activity in the public sector was subdued, as some major road projects were completed and a number of projects planned for 2009 were postponed due to funding constraints. Reflecting the decline in overall construction activity were decreases in the volume of cement (45.3 per cent) and other construction related materials (33.8 per cent) imported.” (pg 42)
The same report goes on, on page 44, to speak of increases in government spending primarily in the area of outlays on personal emoluments, “which accounted for 43.1 per cent of current expenditure, rose by 6.1 per cent ($9.2m) on account of an increase in the number of civil servants.”
At the same time our nation’s involvement in international free trade will cause us to relax certain taxes that are already considered, under new and emerging trading regimes, as discriminatory and unfair. Our movement away from this basket of unfair taxes, made expedient by global, regional and other external factors, has given us the opportunity to make right our tax laws.
The re-introduction of personal income tax ahead of VAT implementation will assist our nation in repealing more than the 12 taxes proposed in the VAT White Paper of April 2010.
Additionally it can cause the rate of VAT, at implementation, to be lower than the rate will be levied if VAT alone is implemented. Some economists and tamarind tree economists, like me, believe that the VAT rate could be 3 or 4 percentage points lower, if personal income tax is re-introduced before or along with the VAT implementation.
The missing link in all this is the convenience of numbers. I am convinced that implementing VAT with a sustained tax net of about 50,000 people is a recipe for hardship. This is where significant immigration reform is needed.
VAT, when well implemented, encourages stronger domestic economic activity. The government will always be at a disadvantage if businesses produce predominantly for export, as exported goods and services are zero rated items, for which businesses can “claim a full credit [from the government]for taxes paid on inputs used in the production or business activities relating to [their] supply.” (White Paper on VAT, pg 11) VAT success therefore demands greater domestic consumption and production of goods and services.
St. Kitts and Nevis upon implementation will become the smallest economic space to use this consumption driven levy to raise government funds. The diseconomies of scale found in a population of 50,000 would be strongly mitigated if St. Kitts and Nevis pursues migration policies that PJ Patterson only on Monday of this week termed as “good migration”.
The time has come that we seek to woo the many tens of thousands of Kittitians and Nevisians and their descendants to come back home. (Not just to languish and waste their time waiting on the bantering bureaucracy.) The time has come for us to identify many skilled persons in craft, the arts and business development to live and set up here in the federation. To achieve the latter, I have always subscribed to allowing, on a sustainable basis, up to 1,500 skilled Haitians to settle in St. Kitts and Nevis with priority in wood carvings, farmhands in agriculture and other areas deemed necessary for national development.
The realisation of a migration policy that grows the population by 30,000 means in every sector of the economy there is to be growth of 75% at least. GDP will grow and once borrowing and budgetary deficits are contained, the public debt to GDP ratio will be cut significantly. Businesses that flow on the migration policy may also assist government by hiring folk at present in the public sector.
With this increase in the population, consumption may reach to rates that may allow the government to lower the intended rate of VAT implementation by 1 additional percentage point.
The adage “many hands make light work” has always been true. The national economy will grow no larger and become no more robust if we do not prioritise in the areas of national development that would create growth and sustain development.
I know there are dislocation and other issues that this recommendation harbours already in the minds of readers, but what possibilities are eluding us in this country because we prefer to be among those “secure from thinking may climb safe to liners, hearing small rumours of paddlers drowned near stars.”
(Derek Wallcott, The Harbour, lines 13 and 14)
Country building will not come about by the quick fixes that IMF and the World Bank and the other Bretton Woods sidekicks throw unto our developing economies. There is need for a more thoughtful rational.
Perhaps the solution is not in my thoughts as expressed here. Perhaps it lies in further consideration and greater planning. Where ever the solutions lie, they need to be pursued with care and the understanding that the best interest of the nation is at stake.
VAT when implemented can be a driving force for true and lasting advancement of the nation. It however needs to be implemented as a part of clear and needed tax reform, with personal income tax, and with policies that grow market size and overall consumption.
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