By Alison Lowe
Nassau Guardian Business Editor
NASSAU, Bahamas -- International evidence suggests payroll tax would have a worse impact on growth and employment in The Bahamas than a value added tax (VAT), according to two New Zealand VAT specialists.
Don Brash, a prominent businessman in New Zealand, who was intimately involved in the introduction of VAT there in 1986, said that he was persuaded in the mid-1980s and remains so today, that VAT is the “least bad tax”.
John Shewan, former PricewaterhouseCoopers (New Zealand) chairman and another leading figure in New Zealand’s VAT implementation process, said that, based on practical evidence and academic research showing the advantages of VAT over payroll tax in many countries, the use of payroll tax as a revenue source “is tending to become unpopular and reducing, while the use of VAT is tending to go up”.
They were responding to a question from The Nassau Guardian on Friday about the advantages or disadvantages of payroll tax versus VAT, given the preference expressed by many members of the business community for a payroll tax as either a total or partial alternative to VAT in The Bahamas.
The pair was in The Bahamas for just over a week at the invitation of the government to share their experiences of introducing VAT in New Zealand, comment on this country’s preparedness for VAT and provide comments and recommendations on technical issues in the legislation. They met with the local media on Friday at the Ministry of Finance.
Shewan, who has been recognized by Queen Elizabeth II and his country with a top honour – that of Companion of the New Zealand Order of Merit – for his services to business, said payroll tax was one of the alternatives examined by himself and a group of committee members appointed by the New Zealand government several years ago to address the issue of tax reform.
“The issue with payroll taxes – and this has been supported both in practical terms by international experience and also by research out of the universities – is that if you impose a tax on payroll, that has the effect of increasing the costs to business or reducing the employee’s wage, depending on who bears it, and it can be shared or fully absorbed by one or the other.
“If it is fully absorbed by the business it’s going to be passed on (the cost of the tax). As a result of that there’s all sorts of evidence of impact on levels of employment, on labour productivity, mobility and so on.
“We looked at a lot of research that usefully ranked taxes from worst to best, in terms of impact on growth and employment. The most distortionary tax to have in terms of its impact on growth is a tax on company profits. That’s considered to be the worst. The next worst is payroll tax, then VAT, and the next worst is a property tax. So, put another way, probably the best overall tax is a property tax. VAT is next. So that kind of shapes the design. And, if you look at what is happening all around the world, that is shaping the design of tax systems. Payroll tax is tending to become unpopular and reducing, VATs are tending to go up (be more commonly implemented),” said Shewan.
He added it is because of the preferability of VAT that the committee he was appointed to decided that it would increase the rate of the tax in New Zealand to 15 percent in 2009, using the additional tax revenue raised to reduce taxes in other areas and increase social welfare benefits.
Meanwhile, Brash said it is notable that in New Zealand over the last 30 years, since VAT was introduced, “no political party has suggested changing it”.
“It’s been widely accepted in the business community and the broader community,” he said, adding that its “self-policing” effect encourages compliance.
In The Bahamas, many business people, including members of the Coalition for Responsible Taxation, which represents a broad slice of the private sector, have argued that payroll tax could be at least one of the methods the government could use to raise revenue in a way that would not require such large compliance costs as are expected under VAT, as it could be administered in a way similar to National Insurance payments through the National Insurance Board.
In the face of comments rejecting the appropriateness of payroll tax as a revenue-raising option from several government officials, the coalition argued that, in the Caribbean context, it has been found to be the most efficient form of tax to administer.
It has also questioned the studies that the government has used to decide it will reject payroll tax, and has commissioned its own study – due shortly – to explore its viability as an alternative.
Shewan and Brash said they also view compliance costs as a critical consideration in a VAT system, but argued that New Zealand has been able to implement a “simple and efficient” VAT regime with “very, very low” compliance costs by having as few exemptions as possible and a flat rate across all sectors.
Republished with permission of the Nassau Guardian