Lead Not Unto Temptation, But Deliver the Public from Taxation

Jun 22 , 2019.

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Last week, a series of pronouncements about taxation was made by officialdom. It shows the growing appetite by the federal government in taxing citizens more in the hope that either it mobilises additional revenues or is meant to be used as a policy tool to discourage the consumption of some products.

Consider the statement of the director of Tourism Ethiopia, Lensa Mekkonen, at a stakeholders’ meeting at which she announced the government’s intention to introduce a “tourist tax” in the coming months. A few days earlier, the Minister of Health, Amir Aman (MD), speaking before parliament, said he would like to see legislators introduce a “sin tax” on cigarettes. There have also been reports and speculations that the excise tax regime currently under review might introduce a higher “sin tax” on beer, among other products and services.

It is not unusual for policymakers to be tempted to use taxes as an instrument to curb behaviours that are detrimental to public health and cost their countries both in life and resources. Even though controlling the temptation to legislate morality is something to think about, many countries regulate the consumption of certain products they find impossible to stop.

The ever-present pressure to mobilise resources for state coffers is also equally understandable. After all, raising money to cover a 387-billion-Br federal budget is not an easy task. The federal agency tasked to generate revenues is required to cover no less than 65pc of this budget.

This must be stressful to Adanech Abebie, the minister of Ethiopian Revenues & Customs Authority (ERCA), and her staff. Not only has the ERCA’s record of mobilising resources been in a decline, but Ethiopia’s ratio of taxes to GDP was also down by two percentage points to 10.7pc last year. It is far more depressing when it is compared to the African average of 24pc. Studies show that Ethiopia suffers from a tax gap - the difference between what ought to be and what is actually collected - of 34pc.

There are several factors for this though.

Essentially, the tax base is shallow. There are far more businesses operating both in the formal and informal economy that are not within the tax net. The state prefers to squeeze those within its reach to the last drop instead of fishing for those it fails to reach to enlarge the pie. And a haphazard enforcement of the tax law already in place is one area Adanech and her team should focus to beef up domestic tax mobilisation.

Lately, national productivity has been hampered due to political volatility and the absence of law and order across the country. The severe lack of forex for many businesses and manufacturing entities that depend on imports has led them to downsize their operations, in many cases laying off people.

Household income has also been dwindling from unemployment, inflation and depreciation of the Birr.

In this sputtering economy, adding a consumption tax, which is regressive in that it affects low-income households disproportionately, may not be wise. Of course, taxation is a vexing issue that is related to one’s political ideology and worldview as well. It is hard to find agreement on the topic.

For instance, the Trump Administration in the US has been giving tax-cut bonanza to corporations and the well to do in the belief that it will stimulate the economy and pay for itself in the long-term. The president bestowed the highest civilian honour this week on Arthur Laffer, an economist whose eponymous Laffer Curve is used by supply-side economists and pro-rich politicians to justify reducing taxes on the wealthy.

But there is an array of Nobel prize-winning economists not shy at expressing their disapproval of Laffer’s thesis. That is why a politician’s stand on tax policy is a perennial election issue that is and should be heavily contested.

On the other side of the continent, Shinzo Abe, Japan’s prime minister, had to delay a planned second hike in the value-added tax for fear of its effect on a slowing economy, which has been suffering from recurrent deflation. He is still contemplating raising it again even though he has met with stiff resistance from those who fear it will slow the economy even further.

All this goes to show that taxation is a complex undertaking with hardly any consensus on what is the best course of action policymakers should be taking. But some general conclusions can be drawn.

Other than the principle of taxation one believes in, there is also the question of timing. Even good policies that may be good in principle, applied at the wrong time, could have unintended consequences. The question in Ethiopia has not been about raising the amount of tax already in place or introducing new ones in as much as it is about broadening the base.

The biggest concern rather should be unemployment. One effect of raising the consumption tax at this time would be putting pressure on the business sector and the resultant loss of sentiment and confidence by its operators. Companies have invested a lot of money and are employing a significant number of workers relative to the economy.

If the sin tax, for instance, is high enough to curb consumption, which is the intended purpose, it will no doubt affect them adversely. That may force them to raise prices or cut production. The first case will push inflation up, and the latter will do the same to unemployment.

Ethiopia has an economic environment where export earnings have been consistently down. The manufacturing sector has been hit with the recent power rationing, if not the crippling unavailability of foreign exchange to import raw materials. Capital spending has also been declining. The construction sector has perhaps been hit the hardest. It is a sector that employs a large number of low earning daily labourers who have no savings or social safety protection to fall back on but are the first ones to get laid off when the economy cools down.

Then there is the elephant in the room: Political instability and the breakdown of law and order that is seen sporadically in all corners of the country, save the capital. All these are factors that do not boost business confidence to absorb additional forms of taxes or further increases on the rate.

Adding a heavy burden to the tax regime right now conflicts with the government’s focus in attracting foreign direct investment and easing the burden of doing business domestically. It would no doubt undermine the administration’s singular macro-economic objectives of creating jobs.

Boosting business confidence and stimulating the economy is what is needed now, not curbing the consumption of citizens or tourists.

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PUBLISHED ON Jun 22,2019 [ VOL 20 , NO 999]

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