A recent study done to justify the introduction of a value added tax (VAT) in a developed regional economy, showed that Barbados has one of the best performing VAT systems in the world. This performance is based predominantly on an internationally accepted measure of revenue productivity.
In fact, the study concluded “data on VAT productivity, i.e. percentage of GDP collected for each percentage point of the standard VAT rate, suggest that VAT is a good revenue raiser in the region”.
Barbados’ VAT revenue productivity was the highest of all the countries used in the study, which included several regional aggregates for CARICOM, Central America, the rest of Latin America, small island states, the European Union and the Organisation for Economic Cooperation and Development.
What an impressive collection!
Solid grounds
In the circumstances, one is wont to question what is wrong with Barbados’ VAT system that requires a hurried reform. The obvious answer is that the Government needs to find revenue from any source possible. Of course, any system, including tax systems, needs to be refined over time, but it has to be done on solid philosophical grounds, not just the need for more at any cost.
Ironically, a study that reviewed the VAT system in Barbados, done in 2012, found that “all three measures [productivity, efficiency and compliance] showed an increase after the introduction of the VAT”. The higher measures/ratios suggest that the VAT is a more efficient tax system than the previous consumption tax.
In light of the above findings, again one needs to question what is wrong with the VAT? It was being suggested in some quarters that the country should go back to a sales tax. For several reasons that are easy to argue, this suggestion was always loaded with ignorance. There is so much literature on the superiority of the VAT over a sales tax that it is not worthy of argument.
The major problem with the VAT is the severe contraction in economic activity that is obvious to all, except the Government’s economic advisers. The VAT is an expenditure tax and therefore such a contraction in aggregate expenditure will compromise the collection of VAT. It is that simple.
There has and will always be compliance issues in any tax system including a VAT and so to give the impression that the country’s current revenue problems are the result of offering tax incentives and concessions is very misleading.
It is apparently forgotten that when the VAT was introduced, it yielded substantially more revenue for the Government than what it was giving up from the taxes that were abolished. Over the course of the next 12 years, the efficiency measures of the VAT increased and the economy was on a growth path.
Worst fall
In 2009, VAT receipts declined precipitously as the real aggregate expenditure/spending experienced its worst fall since the early 1990s. The failure of the Government to stimulate economic activity in the face of adequate foreign reserves gave rise to further contraction in the economy that is adequately reflected in the GDP estimates of the Barbados Statistical Services that are now known to exist.
In spite of the economic decline, VAT receipts had one of its best years in 2011 in terms of collection and the efficiency measures were quite good. It does not take a rocket scientist to appreciate that the ongoing underperformance in the economy is at the heart of most of the country’s economic problems, including its revenue fall-off and the consequent fiscal crisis triggered by excessive public spending.
What is now being marketed as urgent tax reform is really a recipe for further disaster as the Government is convinced of the need to raise more revenue in the extraordinarily trying economic times for Barbadians who have been given a diet of failed tax policies.
The blame that was being carried by the VAT system for not delivering the revenue has now turned into the entire tax system needing reform. This one is too easy to see through for Barbadians to continue to swallow the same bitter pill each time that the Government’s policies have delivered a stillbirth.
Unfortunately, more taxes are on their way to help us celebrate Independence and Christmas. Given the nature of tax policies, the full effects of the new measures will kick in during the New Year. A year that was always going to be renowned for its debt servicing problems will now be compounded by the Government’s folly.
