There has been swift reaction to this week’s announcement by neighbouring Antigua and Barbauda that it is would abolish personal income tax from April.
Head of the Economics Department at the University of the West Indies (UWI) Cave Hill Campus Dr Winston Moore and Managing Partner at the accounting firm, KPMG, Carol Nicholls independently argued that it was not a road Barbados should travel.
In fact, they cautioned that if Barbados were to follow Antigua and Barbuda’s lead, the social and economic implications for this country would be far-reaching.
“I don’t think it is desirable. When I look at other developed countries, I have not seen that as the way to go. It [Antigua’s tax rate] was already much lower than we now suffer in Barbados. Look at the other taxes and duties in place there, how they compare to Barbados . . . because therein could lie the explanation why they can forgo the personal taxation,” said Nicholls.
She was also at pains to point out that the resulting level of disposable income which would be put back in the hands of citizens, could have a negative impact on foreign reserves with a likely increase in imports.
“A lower rate of personal tax would also have the propensity to boost spending clearly and maybe stimulate commerce in that there might be more disposable income. That’s just one side of the equation. We also need to look at our foreign reserves and how those might be impacted . . . cause they might stimulate the level of imports and we know that’s not sustainable to a certain extent unless we have the foreign exchange,” the accounting expert added.
Nicholls said that with tourism being the country’s main export, Barbados would need to ensure it had enough foreign currency to pay for those imports.
“It has its implications, but at the end of the day Government still needs a minimum amount to be able to maintain the standard of social services available . . .
“I would have to do a thorough economic analysis of the implications and if it is that it [abolition of the tax] would be compensated for through indirect taxation, one would really have to look at its impact on those earning less in the economy. If it is going to be a tax on services . . . an indirect tax like VAT . . . they then might suffer an inequitable proportion of the tax burden,” emphasized Nicholls.
She noted that Barbados needed to pay for its social infrastructure and this was done through a combination of direct and indirect taxation.
“If we abolish tax on income then the equation would have to be balanced by income coming from other sources . . . be it indirect taxation . . . something that is levied equally across-the-board . . . for example, VAT. We would have to increase taxation in other areas because the taxation intake from that source would have to be replaced to a certain extent,” the tax expert said.
In the view of economist Moore, Government would be confronted with major social and administrative complications if it were to try abolishing personal income taxes here.
He warned that the issue was multi-dimensional and was not a simple matter of dollars and cents.
“From a purely financial perspective, approximately half of tax receipts [47 per cent] accrue from personal taxes,” noted Moore, pointing out that if the island removed this source of revenue, it would need to find an alternative source of tax revenue.
“Personal income taxes are also used as an income redistribution device. Individuals below a certain threshold do not pay taxes while higher income individuals pay relatively more in taxes. If the system of personal income taxes is replaced by say a system based on indirect taxes, this might have negative distributional implications, as higher income individuals generally consume a smaller proportion of their income and therefore the taxes they pay would also be smaller,” explained the senior lecturer in economics at UWI.
He further pointed out that Government was already faced with administrative issues.
“For example, we struggle with collecting VAT. So if we are depending on Value Added Taxes to generate the additional income that we are going to use from personal income tax, that means we are going to have to fix the administration of the income tax,” Moore said.
He also noted that, “at the moment we don’t depend a lot upon other indirect taxes as an income source”, but suggested that if Government were to become more reliant on import duties to generate revenue that would have other implications.
Moore also pointed out that other Caribbean countries such as Cayman Islands, which depend on indirect taxation, did not provide the same scale of social services as Barbados, including free education and free health care.