For centuries, there has been a heated argument about tax among scholars and economies and if it has any positive correlation with development. For some taxes are forced on the individual making their economic situation unbearable. Is there something we missing out about tax or is there something about it that needs to be looked at if it must work with its intended purpose?.
Taxes that are imposed on income of workers or profits of institutions and businesses are referred as direct taxes. These taxes are often calculated based on certain percentages, and it is not transferable unlike indirect tax, which in some instances are transferred to the consumer. For example in Denmark the percentage on income is 51.3% and this has contributed to 48-50 % of its gross domestic products (GDP) for 15-20yrs.Denmark is making this mammoth sum from tax because of the appropriate tax policies implemented.
For taxes that are stated in percentages, the rate cannot be increased and for taxes that are stated as nominal amount, in Danish Krone Rate cannot be increase. Even the tax freeze does not prevent the restructuring of the tax system.
The tax freeze determines future spending of the government as well as discipline public spending (CTPA).Taxes that are imposed on goods and services are on the other hand referred to as indirect and example of this include, value added tax (VAT), custom duty, excise duty etc. In addition, this tax in most instances is paid by the consumer .The consumer unknowingly pay this tax whenever he or she buys a commodity but this tax is often not based on a certain percentage. To begin with, tax enables the government to breach the poverty gap between the rich and the poor through equal distribution of public goods and services. With the aid of progressive tax, most governments have made the rich to pay more to enable it give the poor in the society their fair share of the national cake(In this case, the rich are made to pay more but the poor are taxed less). It also enables the government to provide social amenities for both the poor and the rich. This helps curb the inequality that would have existed in the absence of taxation.
Inequality is an ill of development upon which all ills of development dwells in, and with the aid of taxation, it would be put to the barest minimum. Government also use revenue generated from tax to pay for the service rendered by the citizenry and put up developmental projects such as schools, toilet facilities, and construction of roads etc. In addition, excise duty has also served as a tool to curtail, prevent or discourage the consumption of certain harmful goods such as tobacco, alcohol, marijuana. This type of tax is levied on those goods to prevent the citizenry from affording them since it jeopardizes their health. Moreover, import tariffs are also used as a mechanism by most government to create chances for local infant industries to grow. With the aid of import tariffs, most governments have prevented big foreign companies from growing at the expense of the infant local industries. This prevents the foreign industries from dumping its goods in the domestic market, the easy inflow of foreign goods has a tendency of retarding the growth of the local industries. This tariff makes the locally manufactured goods cheaper as compare to the imported goods, so consumers will prefer the local goods to the foreign produced due to its higher prices.
Another significant way to look at tax is how it checks inflation (demand pull inflation) in order to stabilize the economy. This form of inflation arises when there is an increase in demand over supply. So this will compel producers to increase prices of goods due to the increase in demand. This increase in demand arises when the disposable income of consumers increases. The increment in disposable income overtime will induce consumers to demand for more goods. Government would then increase direct tax on income of consumers and this will reduce the disposable income of consumers and inevitably help equate demand to supply.
However, most countries especially in Africa have not been able to amass/generate sufficient revenue from taxes as expected due to the excessive tax incentives given to industries. Tax holiday (exemptions from paying tax for a given period) is one of the tax incentive mechanisms that have cost most developing countries especially Africa. A weak tax system thinks giving tax holidays would induce investors but investors are not lured by this offer but are rather looking for the political stability of the country, ability of the work force, availability of resources and the infrastructure of the country. A tax holiday also creates room for investors to redesign their investment as new investment (closing down and restarting the same project under a different name but with the same ownership).
They do that purposely to enjoy these incentives but even without the incentives, more investment could have been made from the taxed profit (over 90% of surveyed investors in four countries said they would have invest even if they didn’t receive any fiscal or tax incentives). In Uganda, majority of jobs are created by investors who did not need any tax or fiscal incentives. If this is feasible in Uganda, can’t it be same in other African countries? A tax holiday also creates chances for exempted ones to go into economic agreement with those that are not exempted to shift their profit to the former, through transfer pricing. For example over paying for goods from the other enterprise and receiving a kickback. (Vito Tanzi, Howell Zee. Tax Policy of Developing Countries PDF).
A lot of developing countries do not get enough revenue from tax as compare to developed nations because most developing counties do not create ways of getting more tax payers but they have a strong conviction that implementing new taxes would enable them generate more revenue, like Marco Rubic, a junior united state senator from state of Florida observed “we don’t need new taxes. We need new tax payers, people that are gainfully employed, making money and paying into the tax system. And then we need a government that has the discipline to take that additional revenue and use it to pay down the debt and never grow it again”. Most countries in Africa do not get much revenue from tax because most employees are found in the informal sector, this induced the government of Ghana to come out with vehicle income tax(VIT) in 2007 because a significant percentage of vehicle registrations are found in the informal sector operators of whom most don’t pay their taxes.
Tax and development are siblings that goes hand in hand, they back each other, None leaves the other and for Africa to develop or compete with the west in terms of development (good roads, hospitals, schools) tax must be given a second look. Tax plays a tremendous role in the development of countries and much attention must be paid to it for its short and long term benefits are enormous. African countries that institute good taxation policies would not look elsewhere for revenue to embark on developmental projects to provide a comfortable environment for its citizens.
Fuseini M Hashim©
+233246019744
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Co-author
Musah Hassan Timtooni
+233241615822
[email protected]
REFERENCE Vito Tanzi, Howell Zee (Tax Policy of Developing Countries PDF) CENTRE FOR TAX POLICY AND ADMINISTRATION.
Action aid tax campaign slides, 2015
ABREVIATIONS:
CTPA-Centre for tax policy and administration
DKR-Danish krone rate
GDP- gross domestic products
