Should services, like car repair, be taxed, as well as goods? *iStock photo
Should services, like car repair, be taxed, as well as goods? *iStock photo

A value Added Tax system would be fairer than the current customs duty on goods.

Craig Simmons, economics professor at Bermuda College, said the current system only taxes one kind of business, those that sells goods, and fails to collect from those that offer services. This makes it discriminatory, he says.  

Speaking at the Chamber’s Budget Break at the Fairmont Hamilton Princess on Monday, Mr Simmons said with Bermuda’s spiralling debt problem, the revenue base has to increase. He saw two different kind of taxes to do that: “There’s no doubt that taxes are going to have to increase. Not only with respect to rates, but more importantly with respect to the base.

“So, rather than our reliance on what I call discriminatory Customs duties, we’re going to have to make the transition to a value added tax on all goods and services.

He added: “What that does is broaden the tax base from about $1 billion to up as much as $2 billion.”

He said a VAT would more efficiently tap into economic activity in Bermuda: “Duties discriminate against businesses selling goods — shared sacrifice should require that people selling both services and goods pay. That’s one idea for getting the deficit down.”

He also floated the idea of a corporation tax: “We already have a role model for a corporation tax, it’s the taxes we impose on our exempted companies. They are not based on profit, instead they are based on size and type of business.”

Mr Simmons was impressed by Friday’s Budget: “The Budget to me was a triumph of economics over politics. A triumph of substance over rheoteric. The most important part, was a triumph of medium term thinking over short-term thinking.

“I was gladdened to see the Finance Minister didn’t pull back the throttle and pursue a path of austerity. But there are dangers lurking beneath the surface.

He said Government is obliged to provide taxpayers and bondholders with a medium-term expenditure plan and a medium term tax plan. Mr Simmons then turned to look at Finance Minister Bob Richards and asked “Where is it? I’m slightly more pessimistic than the Finance Minister about where debt is going to go. I don’t know the recession is going to be over before 2014, possibly 2015. Even if it ends a little bit earlier, the stimulus that Finance Minister has provided this Budget will have to be maintained at least until 2015 — about three years.”

He said that equates to $300 million to $400 million in borrowing for the next three years, which translates into another $900 million to $1.2 million in debt: “I don’t want to be the guy with the bad news, but I don’t believe the $2.5 million debt ceiling is going to be enough.

“The one thing I am looking forward to is the exit plan. How are we going to get out of this mess?”

He said there are only two ways to get out of debt, one was through increasing revenue like his VAT and corporate taxes and the second was to reduce Government spending.