The VAT time bomb is ticking down and the Bahamian people had better wake up before it's too late.. We have listened to the New Zealand experts without taking any measure of what has happened to the New Zealand economy.. Now we had better pay closer attention to Japan whose massive debit is about 238 percent of GDP and which has pushed the Japanese economy into a twenty year period of Stagflation characterized by falling economic growth and deflationary prices as its wealth structure came tumbling down..
Known by Japanese watchers as the "Lost Decades", the 1991-2011 era began the period of the nation's extended economic collapse.. As the result, an ever expanding massive asset (real estate) bubble, fueled on by excessive and out-of-control crony bank speculative lending, finally drove the Japanese economy ultimately into financial collapse.. This set off two decades of massive deflation and stagnant growth.. In response, the Japanese government reacted aggressively by implementing huge economic stimulus policies and has maintained a massive fiscal deficit over this time-frame.. The economic impact and effects of such fiscal stimuli has been tenuous at best having little meaningful impact on turning around the bloated Japanese economy.. This government imposed Keynesian-like fiscal stimulus has created a huge debt service burden for the Japanese government which today has the highest level of debt to GNP in the world.. Massive debt, stagnate growth rates and price levels over the Lost Decades continues today to be troubling indicators of the nation's ongoing financial problems and economic condition..
Today the Japanese are still feeling the pain of decades of economic stagnation, and under its new Prime Minister Abe, new economic reforms, called Abenomics by the Japanese press, were introduced to address the continuing economic stagnation.. A newly imposed consumption tax, in the form of an 8 percent sales tax, was introduced in April 2014 in a deliberate attempt to improve the country's declining fiscal position.. This new tax burden, which the government can increase to 10 percent, has forced radical changes in the consumer spending habits and private sector investment.. The Excessive Burden impact of this highly regressive tax and its resulting Deadweight Loss in just three months has resulted in another painful economic contraction with GNP falling at an annualized rate of 6.8 percent, with consumption declining 19.2 percent and private investment falling 9.7 percent.. Not a pretty picture for an economy that was once an economic powerhouse and has tried unsuccessfully for over 20 years to move towards a stable basis for economic recovery..
Are there important lessons to be learned from the Japanese experience that can apply directly to the Bahamas?? Without doubt; nevertheless, Japan still is a substantial, diversified economy while the Bahamas is a much weaker "Duel Economy" where economic recovery will be highly dependent on external conditions.. Firstly, it must be understood that the economic impact of a direct tax on consumption will always have a negative impact on the aggregate economy, whereas a tax cut or reduction will have the opposite effect yielding a positive economic impact on growth.. No matter what the tax is called by government, a sales tax, VAT or whatever, the results always will have the same negative impact on the economy.. Just as in the Japanese case, GNP growth will decline, consumer spending and private investment also will decline as the ugly head of recession arises as the economic impact of Deadweight Loss will take hold of the economy.. Secondly, both a sales tax and a VAT will create the same economic distortions and dislocations as the result of Excess Tax Burden which leads to growing levels of poverty and expanded unemployment.. Thus, there is no real difference in the two forms of consumer taxation except for their methods of collection and the amounts of tax leakage and loss.. Both forms of taxes are highly regressive, seldom ever raise the necessary revenues that government hopes for and can quickly throw the nation into a severe economic tailspin.. Witness what has just happened to Japan as well as other country's that were foolish enough to blindly adopt a VAT fiscal policy.. To substitute a sales tax for a VAT (or vice versa) as has been proposed by some circles of the Bahamian private sector is just as foolish as the uninformed views of public sector advocates for VAT as economic outcomes are about the same.. Both taxes do equivalent amounts of damage to the economy and yield about the same tragic results..
There is also much the Bahamas can learn from the Japanese experience and its failed stimulus policies which resulted in the dark era of the Lost Decades.. The introduction of VAT could very well usher in our own economic doomsday driving the Bahamian economy into crippling a period of Stagflation and possible financial collapse.. Try to think for a moment.. If it takes over 20 years for one of the world's most powerful economies to hopefully revive its economic recovery, how long would it take for the weaker Bahamian economy to recover from a similar economic downfall?? That of course is anybody's guess, but it would be most wise to avoid at all costs the tragic Japanese experience with ongoing deficit driven Stagflation..
Those that learn from the mistakes of others will eventually prosper, while those that are blind to such errors will more than likely fail as well.. VAT is an invitation to failure and hopefully must be avoided in favor of economic fiscal prudence..
August 13, 2014
