Taxation and Inequality in Africa Comments on Janvier Nkurunziza (UNCTAD) Presentation Valpy FitzGerald, Oxford University Department of International Development
UNCTAD on Tax in Africa Poverty reduction requires public expenditure on basic needs Africa is a highly unequal society (getting worse?) Resource mobilisation without aggravating aid dependency requires great tax revenue as % of GDP This revenue must come from the relatively rich (top quintile) rather than the poor
UNCTAD on VAT in Africa VAT introduced to replace external trade tax revenue, and simplify domestic excise etc. Result is higher revenue, and greater efficiency; but less equity (differential VAT lead to corruption and revenue loss) Efficiency is fine if there is targeted redistribution (flat tax, pro-poor spend) Need for more tax pressure on property, mining and informal sector.
Comment 1: a flat tax and pro-poor spend model is difficult to achieve Model requires highly regressive expenditure, and thus large transfers of income and services to poorer half of population; much more than in current MDG and CCT schemes. Must be based equitable tax pressure outcomes (i.e. % of income) not simply flat rates. And in practice this can only be obtained by: adding a highly progressive tax on income and property to an inevitably regressive indirect tax system with direct tax making up the bulk of revenue (as its progression is limited)
In Chile, low impact of income tax (2%) on top quintile does not correct regressive VAT incidence Before and After -Tax Income distribution for Chile (1996) Decile Income share pre-tax Income share after-tax Change in total share Income tax VAT other taxes Tax System 1 1.45 1.4-0.05 0 11 3.42 14.4 2 2.74 2.63-0.11 0 11.8 4.2 16 3 3.77 3.61-0.16 0 11.4 4.33 15.8 4 4.73 4.59-0.14 0 10.9 4.25 15.2 5 5.57 5.47-0.1 0.01 10.7 4.21 15 6 6.76 6.64-0.12 0.04 10.2 4.07 14.3 7 8.22 8.2-0.02 0.11 9.7 4 13.8 8 10.6 10.61 0.01 0.23 9 3.85 13.1 9 15.42 15.75 0.33 0.62 8 3.54 12.2 10 40.75 41.09 0.34 2.54 6.3 2.96 11.8 GINI 0.4883 0.4961 RATIO 13.41 14.12 Source: Engel, Galetovic and Raddatz (1999) Progressivity (tax as % of income)
UK indirect tax is highly regressive: the progressive income (+ wage) tax can only yield equal fiscal burden because it generates half of all revenue
UK Gini cut from 52 (South Africa) to 38 (EU) by huge income + benefits transfers to poorer half
Comment 2: Africa is nearing world average indirect tax pressure (8 % of GDP)
Yet income and property tax pressure half developing country average Sources of Tax Revenue for various country groups, 2001 Taxes on income profits and capital gains Social Security contribution and taxes on payroll workforce Property tax Subtotal: taxes on income and property Taxes on goods and services Other taxes Percent of GDP OECD a 12.4 9.7 2.4 24.5 7.7 0.3 32.5 LAC b 4.7 3.8 0.3 8.8 8.8 3.4 21.1 Others c 6.5 0.8 0.2 7.5 8.3 3.4 19.2 Percent of total tax revenues OECD 38.2 29.8 29.8 75.3 23.8 0.9 100 LAC 22.1 18.1 18.1 41.5 42.1 16.2 100 Others 33.9 4.2 4.2 39.1 43.2 17.8 100 a. Excludes Mexico b. LAC include Argentina, Brazil, Colombia, Chile, Guatemala, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela c. Others include India, Indonesia, Malaysia, Russia, Singapore, Thailand and Ukraine Sources: Artana, Lopez Murphy and Navajas, 2003 (OECD Revenue Statistics 2001; IMF Government Finance Statistics and IMF country reports to complete on subnational governments). Total
What matters for equity is the % of top quintile income paid in direct taxation Comparative Plato index 30 25 20 15 1970s 1980s 1990s 10 5 0 Argentina Brazil Chile Mexico France UK US
Where Africa still has a long way to go to meet its benchmark (South Africa) Plato index 25% 20% 15% 10% 5% 0% 1990 2005
Comment 3: Is meeting the challenge really so difficult? The key question is whether to retain a comprehensive income tax approach, to revert to some updated version of the older presumptive tax approach, or... de-link the taxation of income from labor and capital (Bird & Zolt) Cited obstacles to taxes on capital income: Savings and investment incentives Capital flight Informal sector
Savings and Investment Incentives Savings as such are not the key constraint on investment in Africa: Capital flight (up to a half of African private assets) is evidence of private savings surplus Investment is low due to infrastructure, institutions, uncertainty (macroshocks, conflict) Tax incentives to investment (FDI, FTZs etc) are too high; need coordination and scaling back to prevent race to the bottom (Keen and Mansour, 2009)
Capital mobility and the tax base An asset tax is preferable to corporate income tax as more difficult to evade through transfer pricing etc (Tanzi) Country-by country reporting by international firms to ensure corporate tax equity for Africa, supported by EU and now under way (OECD); Exchange of information on overseas asset holdings and pressure on tax havens agreed by HMG (DFID, 2009) and G20
Informal sector Easy to exaggerate tax burden on business (e.g. IFC 2009) and in nay case only top quintile of real interest as tax base. Property tax best linked to land registry, and confined to urban land/buildings (agriculture only 15% of African GDP; in non-mineral AfLDCs 35%) Presumptive taxation provides tax revenue and also strong incentive to incorporate; comparatively simple to administer (Tanzi, Bird)
Sources for figures: UK tax and benefit data for 2007-8: Office of National Statistics (2009) Chile tax incidence: Engel et al (1999) African tax trends: Keen and Mansour (2009) Comparative Tax Revenues: OECD (2003) Plato Index: calculation by author using WIDER and IMF data (FitzGerald forthcoming)
References Revenue Mobilization in Sub-Saharan Africa: Challenges from Globalization Michael Keen and Mario Mansour WP/09/157 IMF Joint African Statistical Yearbook (AfDB, AUC & UNECA) 2009 Bird, R. and Zolt, E. (2005). Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries, UCLA Law Review, vol. 52, no. 6. Paying Taxes 2010 The global picture IFC : Washington 2009 The Taxation of Financial Assets: A Survey of Issues and Country Experiences IMF Working Paper No. 95/46 Tanzi, Vito King, J. R.. 1995 Tanzi, V and H. Zee (2000) Tax Policy for Emerging Markets: Developing Countries IMF Working Paper 00/35 A Tax on Gross Assets of Enterprises as a Form of Presumptive Taxation Sadka, Efraim Tanzi, Vito IMF Working Paper No. 92/16, 1992 Presumptive Income Taxation: Administrative, Efficiency, and Equity Aspects Tanzi, Vito Casanegra de Jantscher, Milka IMF Working Paper No. 87/54 1987 Engel, E; A Galetovic, and C Raddatz (1999) Taxes and Income Distribution in Chile: Some Unpleasant Redistributive Arithmetic, Journal of Development Economics, 59: 155-92.