TO TAX OR NOT TO TAX IS THE QUESTION? “It is a contradiction to support increased development assistance, yet turn a blind eye to actions by multinationals and others that undermine the tax base of a developing country…” Trevor Manuel, Former Minister of Finance, South Africa and Special Envoy of the UN Secretary General on Financing for Development In the past two years we have seen a flurry of SI’s by the Government of Zambia as an attempt to stem the flow of dubious financial outflows and also as a way to get more tax from the multinationals particularly the mining companies. However, in the same period we have seen the opposite; we have seen an increased Government deficit of 8.5% of GDP, reduced tax receipts and a foreign exchange rate at its highest breaching the 5.5 kwacha to a dollar barrier for the first time in Zambian economic history. Before the rebasing this would have caused serious worries but it looks better as ZMW5.5 than it would at ZMK5, 500. It is now just above 6 kwacha and declining further by the day. Taxation is a crucial source of sustainable, predictable, long-term development finance. Taxation, along with aid and other forms of financing underpins the future development prospects of all countries including low income countries. It is important that as the Government and other stakeholders in industry discuss the modalities of empowering Zambians to benefit from the current high levels of economic growth, that the good tax and other policies Zambia is already pursuing are used as models. The Government of Zambia must be careful not regulate too much as that alone defeats Government’s programme that aims to foster job creation. If Zambians cannot benefit, then they will not only have been denied a share of the cake, but they will also have been excluded from participating in the economic rebuilding of the country. The current uncertainty and widespread debate on recent major policy shifts such as, the minimum wage increase and SI’s is creating a lot of tension within the business community. But how will the Government balance the need to increase taxes with the pressure to attract new investment and spend more on social services and also the need to stimulate higher growth? Advocates of tax cuts argue that reducing taxes improves the economy by boosting spending; those who oppose them say that tax cuts only help the rich because it can lead to a reduction in government services upon which lower income people rely. In other words, there are two distinct sides to this economic balancing scale. Government uses tax policy to generate revenue and places the burden where it believes it will have the least effect. However, the flypaper theory of taxation (the belief that the burden of the tax sticks to where the government places the tax) often proves to be incorrect. Instead, tax shifting occurs. Shifting tax burden describes the situation where the economic reaction to a tax causes prices and output in the economy to change, thereby shifting part of the burden to others. The policy stance, where the revenues derive from depletable natural resources, like, copper and accrue directly to Government, offer enormous challenges to policy makers, development practitioners and academics. In general, many countries seemingly are unable to manage such revenues in a sustainable manner and succumbing to pressures to embark on over expansionary fiscal programmes. Mining sector revival and high copper prices (though declining now) have contributed to a marked improvement in the trade balance. However, there is minimal impact on poverty reduction with rural poverty bearing the major brunt of the decline in people’s living standards. Depressingly Zambia is still highly dependent on copper exports. The failure of natural resource wealth to lead to the expected economic growth and development has been attributed to several factors, including: a. The so-called “Dutch Disease” — the syndrome of rising real exchange rates and wages driving out pre-existing export and import-competing industries; b. Rent-seeking (corruption) by elites and others that otherwise could put their energies into profit-making activities; c. Volatility of prices and the “asymmetry of adjustment” (it is easier to ramp up public expenditure than to wind it down again); d. Inflexibility in labour, product, and asset markets; and c. Tensions between resource-producing and non-resource producing regions within countries. The PF Government must be very cautious in their approach towards tax policy particularly as it relates to PAYE and higher taxes for the mines. One point of view, states that a tax increase would simply move the spending decision from the private- to the public-sector. However, this view of taxation is very narrow. This view does not recognize the fundamental axiom of taxation. Taxing an activity, any activity, will reduce the level of that activity. For example, raising the taxes on cigarettes will reduce cigarette consumption. Raising the tax on home ownership will reduce home ownership. Basic economic theories of supply and demand show that when anything rises in price, as occurs with a tax increase, less is demanded. This fundamental axiom of taxation applies in the same manner with income taxes. Income taxes reduce the incentives to engage in activities that generate income, such as work, savings, and investment. Consider the simple example of a firm that is considering investment options. Suppose the firm decides that it will only consider investments that are expected to produce a 10 per cent rate of return. If the government imposes a 50 per cent tax rate on investment income, the firm will forego many formerly worthy projects. Now only projects that are expected to produce a 20 per cent pre-tax rate of return will be considered. Many formerly sound investments will no longer be sound for the simple reason that taxes are too burdensome. Investment is a forward looking endeavour. Businesses will invest only if they perceive that they will be rewarded with higher profits in the future. A healthy desire to invest will increase economic output. It is imperative that as the Government considers taxing the mining and other foreign companies more that ‘we do not throw the baby out with the bathwater or kill the goose that lays the golden egg!’ Balanced budgets require a Minister of Finance and a Parliament that is committed to holding the line on spending. Otherwise, we will find ourselves going back to the days of huge budget deficits, foreign debt and donors controlling our economic policies. The way to improve the economy is by returning more control of the economy to Zambian private citizens and not to the Government. TREVOR SIMUMBA, INTERNATIONAL BUSINESS CONSULTANT
Posted on: Mon, 10 Mar 2014 15:24:57 +0000
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