Higher taxes can save economy

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Finance Minister Mthuli Ncube

Clive Mphambela
Finance and Economic Development Minister, Hon Professor Mthuli Ncube recently announced a 2 cents in the dollar tax on electronic transactions as the country moves to broaden the tax base by harnessing all minor of transactions.

Undoubtedly, the move has been met with a big backlash from the transacting public and the formal corporate sector who feel that the tax may have negative consequences on the financial lives of the majority of Zimbabweans.

Many have also expressed feelings that the tax is an unfair attempt by the Government to impose an additional burden on an already overtaxed economy?.

However, there is also a general agreement by all, that the tax is indeed a quick win in terms of revenue generation for the fiscus, which will contribute to plugging a major budgetary gap for the Government.

What the Zimbabwean public is, however, not acknowledging is that the tax is actually better devil, than many of the alternatives on the table.

There are many reasons why Zimbabweans must, as a collective, share the pain of economic adjustment. I will share few thoughts as to why I honestly and sincerely believe that we should all come to the table to assist the Government’s efforts to turn around the economic fortunes of the country, not just with ideas, but with money.

The Black Economy is not contributing its fair share to the economy

For decades now, the grey or black economy in Zimbabwe has not contributed positively to the economy, or at least not as much as it should, given its growing influence and size.

Many black economy participants, such as smugglers, informal traders, money changers and second had vehicle dealers are making fortunes but contribute nothing to the fiscus.

However, everyone enjoys benefits of subsidised education and healthcare and transport. Every citizen of Zimbabwe also enjoys substantially subsidised electricity and fuel. Many informal and small businesses do not pay PAYE or remit VAT to the Revenue authority.

However, due to circumstances, many of these economic players have been forced to move into the electronic transactions net and the IMMT is in the short term, a very good way to tax these economic actors. Minister Mthuli is perhaps right in his move, although admittedly, the structure needs further refinements. The idea is very sound.

The increase in the informalisation of the economy and huge spikes in electronic and mobile phone-based financial transactions and real-time gross settlement transactions (RTGS),  make the need to expand the tax collection base and ensure that the tax collection points are aligned with electronic mobile payment transactions and the RTGS system a no brainer at all.

So far during 2018, over 1.7 billion transactions have been conducted electronically, the latest Reserve Bank of Zimbabwe figures for the half year to June showing that the value of electronic transactions amounts to $65 billion.

The 2 percent tax therefore would imply a revenue stream of some $1.3billion for six months, which can stretch to over $3,5 billion per year.

Making a similar projections for the remainder of the year means that government can easily cover a substantial portion of its budget from the new tax, and this is a good thing.

Higher taxes are definitely better than an inflation Tax.

The second major reason why Zimbabweans should accede in my view to a new taxation framework is that the alternative is worse. The economy right now is on the verge of hyperinflation phase two.

If Government continues to print money to cover its budgetary shortfalls, the economy risks succumbing to hyperinflation, again. Such a scenario would mean everyone loses everything.

Frankly an additional 2% off my purchasing power is palatable. An inflation tax would be disastrous.

Perhaps we actually need to support the tax moves in my view with additional taxes on fuel, which is now relatively cheap, and government must also consider imposing foreign currency duties on non essential luxury goods, trinkets and motor vehicles.

Successful countries have generally higher tax rates.

Many countries, especially in Europe have very high tax rates. For example Denmark collects about 9,6 percent of GDP through the VAT, Norway collects about 7,8 percent, and Sweden collections about 9 percent of GDP. All three countries also have VAT rates of some 25 percent.

It may be worthwhile to study the taxation policies that many of the Scandinavian countries (Denmark, Norway, Sweden) are commonly known to have. These revenue policies support programme such as government sponsored college education, paid parental leave, and universal healthcare for instance. For us, taxes can get us out of the woods.

It could be instructive to look at how the Scandinavian countries structure their tax systems in order to raise revenue for a variety of government programs.

Scandinavian countries are known for having very high taxes on income. According to the OECD, Denmark (26,4 percent), Norway (19,7 percent), and Sweden (22,1 percent) all raise a high amount of tax revenue as a percent of GDP from individual income taxes and payroll taxes. This is compared to the 15 percent of GDP raised by the United States through its individual income taxes and payroll taxes.

In order to raise a lot of income tax revenue, income tax rates in Scandinavian countries are rather high except for in Norway. Denmark’s top marginal effective income tax rate is 60,4 percent. Sweden’s is 56,4 percent. Norway’s top marginal tax rate is 39 percent.

The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the he is associated or connected with.

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