A Barbadian economist following developments here from his home in Canada is predicting that Government’s massive corporate tax cut will lead to a higher cost of living for Barbadians, as a shrinking tax base will force even more taxes in the New Year.
Carlos Forte, a former Central Bank of Barbados official who emigrated to Canada, told Barbados TODAY the decision by the Mia Mottley administration to slash the business tax rate from 30 per cent to between one and 5.5 per cent effective next year, was
a very significant but “regressive” development.
“My expectation would be that the new imposition of taxes to come would translate into increased cost to Barbadian consumers, and essentially translate into a higher cost of living, which is already high in Barbados,” said Forte.
“It is likely to result in a more regressive form of taxation as opposed to a progressive form of taxation, where in the context of income taxes, those who earn more pay more,” said Forte.
Making the announcement on Tuesday, Prime Minister Mottley said the scheduled taxes would be “revenue neutral”, while outlining that the change was make Barbados compliant with the Organization for Economic Cooperation and Development (OECD), the club of the world’s wealthiest nations.
But Forte said while the measure would grant Barbados some reprieve from the prospects of being sanctioned by the OECD for harmful tax practices or being blacklisted as a tax haven and an uncooperative jurisdiction, it would “significantly erode” the country’s tax base.
He insisted that the prospect of attracting international business was for the medium to long-term but the short-term measure would place a higher tax burden on ordinary Barbadian consumers.
“This is particularly noteworthy given that Barbados is currently in a structural adjustment programme characterized in part by significant fiscal consolidation,” said Forte, who recalled that the corporate tax rate was only increased a few months ago from 25 per cent to 30 per cent to raise revenue.
The lowering of the domestic corporate tax rate therefore meant “Barbadians can expect and ought to expect, significant tax reforms in the New Year that aim to make up the revenue, at the very least, [that] would be lost from this new policy of corporate tax convergence between the domestic companies and . . . offshore sector”, Forte told Barbados TODAY.
“It in effect is a demonstration of what some economists globally fear or have expressed concerns about, which is referred to as a race to the bottom where corporate taxation is concerned. In their pursuit of corporate tax competitiveness to attract corporations and businesses and spur investment, countries competing with each other progressively over time reduce their corporate tax rates to the point where it erodes their domestic tax base,” he explained.
“Effectively by this method, we in Barbados essentially have eroded our corporate tax base, and the tax revenue loss would have to be made up elsewhere as the Prime Minister alluded to. There would be an emphasis on, going forward, taxing consumption and wealth. The taxing of consumption is particularly noteworthy because this has implication for increasing consumption taxes such as the Value Added Tax, the recently introduced fuel tax, and the Prime Minister made references to property taxes as well,” he said.
In her ministerial speech, Mottley had stated that “the broad tax principles we are following are that we shall lighten taxes on work and productivity such as personal income taxes or corporate income”.
“The burden of taxation will fall on consumption and wealth, such as VAT, petrol taxes, user fees and land tax. We will protect those most vulnerable through the use of the innovative reverse tax credit,” Mottley added.
But Forte said the move was a way of Government giving benefits in one hand that it takes away with the other, suggesting that this was a sea change in the type of tax policies Barbados has sought to maintain over the past five decades.
“It is a bold move that on the surface appears to be a reduction in taxation particularly for corporations, but Barbadians should expect in the New Year, as the Prime Minister herself has signalled, to operate in a country that has an increased tax burden in the sphere of indirect taxation and that in the short-term will translate into a higher cost of living in the country and higher transaction costs in certain respects; take land taxes as example,” explained Forte.
Two days ago, the opposition United Progressive Party (UPP) placed Barbadians on guard to brace for an increase in taxes.
The UPP, led by a former Barbados Labour Party international business minister and technocrat, Lynette Eastmond, called on the BLP administration yesterday to “determine whether it intends to have its tax system determined by OECD countries in the interest of the OECD countries”.
But offering a differing view, noted economist Jeremy Stephen suggested to Barbados TODAY on Wednesday that the corporate tax reduction should result in the private sector absorbing recently retrenched public workers given that they should have more fiscal space.
“Those rates that Government came up with will not result in a major loss in tax revenue. Even if it did, the losses will not be substantial enough to dampen tax revenue because corporate tax revenue is only ten per cent of the total taxation,” the UWI economics lecturer said.
Private sector officials have so far welcomed the reduction in corporate tax rate, while signalling that businesses should be in a better position to invest more.