A PART from politics, religion and, in these parts of the world, football, not many other subjects tend to elicit more emotive debates than the subject of taxes. Taxes are money that must be paid to the State. They are mandatory payments.
Once it has been decreed that certain activities, transactions, earnings or assets should attract a tax then that will be pretty much it, really.
No discussions thereon will be entertained! Taxes are among those actions by a government that leave no room for argument against their imposition. The best that the public can do to minimise the tax burden is to engage tax accountants or tax lawyers or economists who are able to analyse a taxpayer’s standing to see if there could be instances where the referred to tax payer could avoid, please note not evade, paying a tax.
To a linguist those two terms appear to have the same meaning but to tax specialists the two demarcate the boundary between a legal action and an outright illegality. Avoidance of tax calls for lawful means that a taxpayer could avail themselves of and not pay a particular tax without violating the law. Tax evasion, on the other hand, is illegal.
Governments, the world over, levy taxes on citizens.
Some countries levy low taxes and others levy extremely high taxes. The history of taxes is a very noble one. When communities morphed from nomadic hunter gathering communities, whose inhabitants wandered about the then largely open space in search of food and water, into settled closely-knit agrarian-centred communities, a paramount need for the regulation of community members’ activities was born. Community dwellers with sticky fingers had to be excluded from mainstream society and confined somewhere where they would not be able to continue practising their disgraceful art of illegally dispossessing individuals of their assets.
Institutions referred to as correctional facilities and all ancillary services leading to incarceration of those who commit that which the State deemed was reprehensible and had to be punishable for became sorely needed.
With the passage of time, infrastructure in the form of wide roads, for instance, became a must have as well to enable farming communities to get their excess produce to the market. The marketplaces had to offer reasonable amenities like ablution facilities and some form of policing to ensure public order was maintained at the markets.
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Thieves normally find gatherings to be very lucrative operating environments for them, hence the need for some form of policing of the marketplaces and provision of a certain level of security to genuine traders and customers alike. Somebody had to provide those services. No one was willing to provide those services for free.
Besides, had there been any who would have exhibited sincere interest in providing those services for free, on whose authority would they be availing themselves of the power to enforce law and order?
Central governments were required to provide infrastructure, judicial services, a police force and an army to defend the territorial sovereignty of a community once boundaries between and among communities were created.
Central governments are the best authorised entities to provide public goods. No matter how developed a community can be, barbarians will still be found among its citizenry. Likewise, thieves of all shapes and sizes either practising or dormant will not be absent too.
Central governments provide crucial services like enforcement of law and order through the police which enable husbands of beautiful ladies to sleep soundly in the comforts of their opulent mansions without fear of barbarians pouncing on their women and thieves helping themselves to their property. The law and order enforcers have to be paid. The money has to come from somewhere.
Contemporary society presents many areas where misunderstandings could naturally occur. Public courts are required to settle disputes among citizens of a country. The judicial officers have to be paid also. Passable roads have to be constructed and not many individuals will be able and, even if able, happy to individually fund road construction projects when it will be impossible once constructed to exclude non-contributors from enjoying benefits from utilising the said road.
The inability of a private investor to exclude non-contributors from enjoying the benefits that derive from utilisation of public goods necessitates provision of public goods by central government. Central government, unfortunately, often has to rely on taxes to fund government expenditure.
This is largely because most governments elect to play a regulatory role exclusively as opposed to participating in industry and commerce. The jury will forever be out on whether that is the best strategy or not. One strong argument in favour of that stance is the undeniable and untenable reality that it could prove to be difficult to effect objective self-regulation in the face of cut-throat competition that will be threatening one’s viability if one could tip the scales in their favour through being heavy-handed in regulating competitors.
Taxes serve as a means through which legitimate governments not only acquire needed funds for expenditure on public goods and services but can also be utilised as an instrument by which governments can manipulate the publics’ spending habits to align them to the desires of the government.
For example, a government can stimulate economic growth by levying very low income taxes with the converse holding true for constraining economic growth. Low income taxes result in higher disposable incomes. If we hold everything else constant, higher disposable incomes either trigger higher consumption or higher savings or a higher prevalence of donations of any kind (which are a form of consumption anyway). If fewer and similarly low tax heads buttress the low income taxes, the resultant consumption or savings would collaborate to induce higher investments.
If consumers demand more goods, in aggregate terms, producers would be incentivised thereby to scale up production to meet the increased demand.
If scaling up requires increased investment then industry and commerce could require some form of financing like loans for plant and equipment upgrading. We said earlier that the low income taxes could trigger higher savings, which means banks and other deposit taking financial institutions would have registered an increase in savings which they can readily loan out to entrepreneurs.
Even if the scale of savings would not have grown appreciably, in that environment, banks could borrow offshore and loan out those funds to local businesses with reasonable expectations of registering low non-performing loans since the increased aggregate demand would serve as some form of signal and hence assurance of business viability and potential profitability hence ability to pay back the loans.
On the other hand, high taxes and manifold tax bases generally lead to low disposable incomes. Low disposable incomes result in reduced consumption expenditure and dwindling savings which, in turn, lead to scaling down of production and diminished levels of savings which ultimately results in a significant decline in economic growth.
Taxes should not become unwieldy. They should be sufficient to cover necessary and budgeted for government expenditure while facilitating economic growth and higher standards of living. It is always wiser, for instance, if one feels the size of cake they are getting on their table appears to be smaller than their appetite for cake could be demanding, to work towards increasing the absolute size of the cake as opposed to cutting ever increasing sizes of the same size cake for themselves in a household with others who equally crave and are entitled to said cake.
In such a scenario, one ought to work on optimal acquisition of a larger baking tin, more ingredients and bigger size ovens to enable them to bake a bigger cake. Ten percent of a 1 000 will forever be larger than 100 % of 10.
Taxes are a type of a Golem. If governments handle them well, they can serve them rightly and unflinchingly. If, however, they are handled poorly, they, like a Golem, could turn against their masters in a truly remarkable and nasty fashion.
Most governments aim for creation of a favourable business environment that, on its own, could serve as a magnet for investment. A punitive tax regime scares away investors. A balancing act has to be engaged in between business enablement and enabling government to create an enabling environment all centred on how taxes are treated.
The danger with over reliance on taxes to fund government expenditure is that taxes are a little sweat way of getting funds which Treasuries the world over usually become so accustomed to utilising in funding government expenditure. As with all little sweat activities, if fruits therefrom appear sweet, those activities quickly become addictive and if care is not taken the desire for more such funds could, in no time, spiral out of control.
Governments that desire to register sustained economic growth should enable a truly growth-oriented policy consistency. Policies should converge on attracting significant investment which, in time, would create increased taxable income which, in turn, would mean increased revenue for government.
To attain sustainably high rates of economic growth, knowledge of economics assures that lower taxes and fewer tax heads are more conducive to attainment of such an aspiration than higher taxes and more tax heads.
Taxes can become grounds for political contestation, if they are not managed prudently. Those who remember their taught or lived history well enough will no doubt recall that one of the reasons cited for triggering the Second Chimurenga war in Zimbabwe was unwieldy taxes. Some of the taxes that aggrieved the masses included what the settler government referred to as a hut tax, livestock tax as well as other hitherto nonexistent tax bases that the settler government was levying on the citizenry.
These days, contestations on economic issues need not turn political and emotive thanks to contemporary approaches to arriving at a common understanding through ideas’ contestation and information sharing that is now standard operating procedure in our society and many others the world over. Sustainable economic growth is more readily attainable in peaceful environments compared to the scenario under political turmoil.
Government could set itself off to successful attainment of higher rates of economic growth through the following ways, among others. Galvanising all initiatives that spur economic activity could lead to unification of purpose and focus of efforts. Fighting endemic corruption through shunning a kid glove approach towards fighting it is imperative. One easy way of doing that is to simply ensure a key component in the fight against said widespread corruption, by the name of whistleblower is protected from persecution by corrupt powerful business leaders. If a whistleblower is exposed to victimisation in the form of wrongful dismissals, bodily attacks and malicious assaults on their professional standing through malicious litigations and maligning in the media, would-be whistleblowers are thereby discouraged from reporting corruption. If victimised whistleblowers are promptly restituted and protected from persecution or even rewarded for exposing corruption as is done in some jurisdictions, corruption could soon be on its way out.
Energising foreign currency earning engines like special economic zones through their prompt licensing could be a low hanging fruit that the government could pick in the short run. Beneficiating all the country’s minerals within the country prior to exportation and enacting legislation that halts the haemorrhaging of mineral resources by foreign companies that export the country’s mineral wealth in their raw forms thereby earning the least amounts per export ounce could also be another low lying fruit that the country could pick and enjoy without delay.
The initiatives cited could significantly enlarge the size of the economic cake thereby making the respective size of pieces cut of the same percentages larger than the erstwhile same percentages of the smaller cake!
- Prosper Munyedza is an economist, training facilitator and management consultant. For feedback, kindly feel free to get in touch with him via email on: [email protected]
