Monday, February 4, 2008

On the intersection of taxes and services in Africa

Let’s talk about taxes. It’s something I know little of, and frankly don’t spend much time thinking about. I stumbled across a few studies regarding taxes in Africa, which offer a much different view than the tax debates I am used to hearing in the United States.

One, African governments get much of their tax revenue (outside of import duties) from firms, businesses and other corporations. One reason for this is simplicity. Tucked inside a World Bank report on Burkina Faso a few years back was the fact that the government couldn’t start a more complete personal income tax regime because it had not yet created a full tax roll. (One problem was the guy compiling the list left for another job, forcing the government to find somebody else, which set them back about six months.)

Businesses are much easier to track than individuals. They need licenses, plenty of licenses to do business, so they are easy to place on a tax roll. Unlike families, it’s hard for businesses to hide all their assets. A friend who grew up in Dogon Country in Mali told me of his father hiding things like television sets and a few of his brothers every time a tax collector would come around. I thought you had a few more kids? The collector would ask. No, no they died, his father would reply.

One of the reasons Africans are so leery about paying taxes is that, like people elsewhere, many feel the quality of government services pale in comparison to their tax bill. They have a legitimate beef. A decade-old IMF-sponsored report found that after investigating taxes and services in eight sub-Saharan African countries, researchers found the distribution of resources are surprisingly unequal: Significant government services are often priced out of reach for the poorest.

For example, schools. Reviewing the charges parents pay to send their children to school – tuition, books, uniforms – the study’s authors, David E. Sahn and Steven D. Younger, discovered primary public schooling is by and far the most progressive service across the board. That means the prices are low enough that the poor benefit from the service – going to school – more in relative terms than the rich. (Studies show that a person’s average income increases for each year of school completed.)

However, as pupils climb the education ladder, school fees become proportionally more regressive, pricing out the poorest families. That’s a truth I know from Burkina Faso, where many of my friends from poor farming families were forced to quit school after finishing their primary education.

Universities are the most regressive educational institutions of all. Although African colleges may have be famously overcrowded (and provide little future job security), only those toward the upper economic tiers can usually afford to send a child.

Health Care
Researchers also tracked the relative costs of health care. They found that the most equitably priced health clinics were those who they offered the most simple of services. For the more sophisticated health units, their prices become more regressive. There’s also an urban-rural dichotomy at work. On average, people make less money in rural areas than in cities, and researchers found the fees charged by rural health centers (often providing fewer services) were more progressive than the costs of urban health centers. (Strangely, those in need of health services have many more choices for care in urban areas than in villages.)

If we can generalize, the truly poor only benefit from the most basic of government services: primary education and basic health care. Anything more complex becomes disproportionably too expensive for those at the bottom economic rungs. You could argue that if a government’s mission is to help reduce poverty and inequality, they are failing in these eight sub-Saharan African states. Think of it from another vantage point. Governments are aiding the wealthy – those who can afford to go elsewhere for schooling and health care – and charging the poor to do so.

It’s not all bad news, however, in these eight representative countries: Ghana, Mauritania, Tanzania, Uganda, Guinea, Madagascar, Cote d’Ivoire and South Africa. These governments, the researchers found, generally have created a set of very progressive tax arrangements. Some of the continent’s most prolific taxes – VAT, wage, sin taxes like alcohol and cigarettes and surcharges for gasoline – are fundamentally skewed towards aiding the poor.

Nigerian solution
Another issue for taxes in Africa is their complexity and opacity. In Nigeria, which is beginning an overhaul of its tax system, Thompson Ayodele argues in the Entrepreneur there are presently 35 different taxes collected by all levels of government. To make matters more complicated, tax collectors are known to negotiate the amount of tax liabilities with different businesses, further depleting their legitimacy. When taxes become convoluted or duplicated, he says, people find ways to stop paying them, further driving down government revenue.

Ayodele, the director of the Lagos-based think tank Initiative for Public Policy Analysis, feels that the Nigerian government must balance the need to gain revenue through taxes while not scaring off potential investors. Thus, the government should rethink taxes not as a form of revenue, but a method to lure foreign direct investment, which creates jobs, raises incomes and doing so, increases tax rolls.

One way not to do this is by raising business taxes too high, which force owners to pass the expense directly on to customers, who may already be living on a tight budget. Instead, the government should look at creating a flat tax for corporations, which has been tried to great success in places in former Soviet-dominated Eastern Europe like Estonia and Slovakia.

There is also a precedent in the United States. U.S. politicians often decry the country’s official high corporate tax rate, but studies have found that U.S.-based corporations pay less in taxes than businesses in other countries. That’s because the tortuous nature of U.S. tax law allows those with the means to hire a coterie of lawyers the added bonus of hiding revenue and creating tax havens overseas. In SmartMoney, Igor Greenwald argues that the U.S. government should decrease the current corporate tax rate of 32 percent to, say, 28 percent (Sweden’s rate), and pick up lost revenue by eliminating the code’s countless exemptions and industry-specific perks. A lower tax rate will decrease the attraction of tax havens and businesses (and government) will be thankful for a more straight forward tax code that should help lead to uniform bills year in and year out.

You can take your taxes
Throughout the world, taxes are the most visible manifestation of government’s relationship with its citizens. The tension between high taxes and poor services is universal. That is why even the most abusive of governments understand the need to balance revenue and provide essential services. (Two old clichés: Some people still speak fondly of Stalin because each year, prices for food actually went down. Most of Chile’s middle class were said to endure Pinochet’s brutal rule because taxes were low.) Governments also understand that history provides many examples of revolutions being ignited over overzealous tax rates in poorly run countries. No matter what form of government a country has, providing proper services at the right price is a universal need.

Here’s an argument. As West Africans become better educated, they are finding their voices to make more demands on their governments. This new confidence will certainly transform the debate of taxation, fees and services. If West Africans believe that governments have the duty to decrease poverty and increase equality, the continent’s statehouses and parliaments will have their work cut out for them.

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