growing economic problems. The goals of VAT implementation in St. Lucia were to encourage domestic and foreign investment, eliminate distortions of prices in the production process, minimize tax leakage, and broaden the tax base. It aimed at systematically recapturing lost revenue from tax evasion and prior consumption taxes that had been ineffective. A fixed rate of 15 % was adopted in October 2012.
Subsequent to the drafting of the first bill, the issue of VAT became the most contentious topic in St. Lucian politics. After four years of implementation and further economic and developmental regression, there is still an apparent need for clarity on the matter. Moreover, other similar Small Island Developing States( SIDS) are in the process of considering VAT, without comprehensively evaluating its effects on economic growth in similar nations. Moreover, SIDS such as the Bahamas have adopted VAT, without comprehensively evaluating its effects on the macro economy. Although the Bahamian VAT is set at a rate of 7.5 %, many of the same consequences of St. Lucian VAT can be expected in the Bahamas due to similarities in the core structure of these economies.
Aggregate Demand is one way to measure an economy’ s Gross Domestic Product( GDP), the value of all goods and services flowing through the economy. It can be expressed by looking at the sum of consumption, investment, government expenditure, and net imports. A change in any one of these components translates into a direct change in GDP. The components that have the most significant impact upon growth, namely household consumption and governmental expenditure, were significantly altered by the VAT implementation in St. Lucia.
In 2012, household consumption accounted for 59 % of GDP in St. Lucia. When implemented, VAT shifts the supply curves of taxable goods and services with prices increasing by the amount of the tax. VAT leads to higher average prices, making less of the population willing or able to consume. Ultimately, this shifts the quantity of goods demanded. In theory, VAT’ s revenue neutrality should have minimally affected disposable income and marginal propensity to consume, and the elimination of previous consumption taxes should have offset potential consumption reductions. In practice, though, aggregate demand experienced an immediate decline as firms and individuals consumed private stocks of goods instead of purchasing new goods. However in the long run, firms and individuals are expected to resume normal consumption patterns.
Forecasters predicted that St. Lucia’ s economy would eventually recover, as consumption would resume as the tax burden diffused and ultimately increased disposable income. However, disposable income per capita has continued to shrink as VAT has become more pervasive in the lives of consumers. The overall decrease in disposable income is actually only resulting in a 5 % broadening of the tax base, which only marginally alleviates the tax burden. Consequently, the net result of all of these effects has led to a-4.7 % change in St. Lucia’ s consumption in 2012. We can only hope that The Bahamas and other SIDS will not meet a similar fate.
“ SUBSEQUENT TO THE DRAFTING OF THE FIRST BILL, THE ISSUE OF VAT BECAME THE MOST CONTENTIOUS TOPIC IN ST. LUCIAN POLITICS.”
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