Top economist: VAT regressive

One noted regional economist has described the Value Added Tax (VAT) as among “regressive” taxes in the Caribbean that need to be reformed.

Marla Dukharan sounded her disapproval for the tax mechanism while expressing disappointment at governments in the region for not doing enough to address the issue of inequality, which had been made worse by past crises.

Making a case for more targeted policies and special attention to be given to women-led households and businesses, the Barbados-based economist said that if the inequality faced by women and the regressive tax regimes in the region are addressed, “we should see results as it relates to human development and sustainable socio-economic progress”.

Addressing a virtual session hosted by the United Nations Development Programme (UNDP) to officially release the Regional Human Development Report 2021 – Trapped: High Inequality and Low Growth in Latin America and the Caribbean on Tuesday, Dukharan said “the issue of inequality, which has been exacerbated greatly by the last global crisis and is now being crystalized in this pandemic” needed to be urgently addressed.

“To me, there are no policy efforts in the Caribbean currently intentionally designed to address inequality, but again to me, one of the best ways to address it and the most obvious way is via women. Policies targeted at supporting female, single-headed households and women-led micro, small and medium enterprises, to me, are likely to have positive effects not just on the women targeted, but on their families and, therefore, their communities and the wider economy,” she reasoned.

She said things such as more affordable, high-quality child care and elderly care, transportation for women to get their children to and from school, meals for children in schools, tax benefits and addressing the digital divide could be some of the areas to consider.

“Furthermore, another solution I think we need to carefully think about that I am not seeing anywhere in the Caribbean region to address inequality specifically, [is] we need to overhaul our tax framework to make sure that taxes are progressive. As it is now, from my cursory review of it, it seems to be that the taxation framework across the Caribbean is quite regressive,” the Trinidadian-born economist said.

“Why do I say that? Value Added Tax (VAT), which exists across the English-speaking Caribbean and beyond in other non-English-speaking Caribbean [countries], is an actually regressive tax unless it is very carefully calibrated in terms of its exemptions and zero ratings. In general, a VAT is a very regressive tax and, not only that, it is administratively very costly and inefficient to apply. That needs to be addressed,” she insisted.

Pointing out that many countries also had one income tax bracket, Dukharan said that was also regressive since it “affects those at the lower levels of taxable income disproportionately versus those at the higher levels of taxable income”.

In Barbados, VAT was introduced in 1997 at a rate of 15 per cent. Towards the end of 2010 the rate was increased to 17.5 per cent, with the intention of that increase being temporary. However, there has been no change to date.

In fact, in 2019, Government then implemented an online VAT collection tax as more individuals moved to online shopping.

At the beginning of last year, the Mia Mottley administration increased the VAT on the accommodation sector from 7.5 to 10 per cent. At the same time, Government also made slight changes to the income tax regime, lowering the tax rate on earnings above $50 000 per year. There is also a reverse tax credit of $1 300 for individuals earning less than $25 000 annually.

Meantime, Dukharan said while the data presented for the Caribbean in the latest human development report was limited, she agreed there was “a wide dispersion in inequality levels”.

She argued that the inequality facing the region had worsened over the past 12 years as a result of the global financial crisis, which she said did not receive carefully targeted policy responses from governments.

“This time, in response to the current crisis brought on by the pandemic, the money is being given directly to the people in the form of stimulus cheques, unemployment benefits, small business support mechanisms . . . and we have seen the impact of all this liquidity in the buoyant remittance flows that we are receiving in this region in the Caribbean, for example.

“The lesson from this being that the effects of a policy response over a decade ago are underpinning the weaknesses we are experiencing going into the pandemic and the policy response this time to the crisis was adjusted. However, we have yet to see specific policies which address the inequality left over from the last crisis. At least in the Caribbean, we have not seen any policy response specifically addressing inequality,” Dukharan noted.
(marlonmadden@barbadostoday.bb)