WHY we got it all wrong on taxation…..
Taxation has been defined by economists as the reduction of both purchasing power and investment. The former being PAYE deducted from employees and the latter funds that should have been used to create more wealth by companies.
A rise in taxation affects economic growth in the long run as it acts as a disincentive to investment .A necessary ingredient to growth in the economy. This is why taxation is viewed as a double edged sword. In the short term it pleases bureaucratises in the govt that they have collected so many taxes. But then one should ask use tax money for what? Most of the tax money end up being misused anyway.
And in Zambia this ends up paying civil servants who number 160,000. And most disheartening the civil servant salary bill is 60 % of our budget when the world average is less than 25%. We spend more money on consumption rather than infrastructure developments!. Rural areas who are 60 % of our population need more feeder roads to transport their produce among other needs. But the bulk of the taxes money collected goes to paying salaries of most civil servants who live in towns…
Successful economies and taxation…
A glance at successful economies all of them have reduced corporate tax to 20% and 21%. It was china who spearheaded this move in the 80s by reducing corporate tax to 20% .When the world saw the success stories of nonstop 10% growth for a decade the west and other countries followed suit in the 90s.Uk reduced from the highs of 45% to the current 21% in corporate tax.
China by reducing taxation has seen tremendous growth in the economy in the last 30 years .Today china has reduced poverty levels by 30% pulling a massive 300million people out of poverty. What is interesting china today collects more taxes through PAYE as more people got employed.
Countries like Ireland removed corporate tax altogether in the 80s…and experienced growth throughout the 90s.Macedonia today will charge zero tax for companies who don’t declare dividends to shareholders. If a company doesn’t declare dividends it means the funds are used to spur growth through further investments. A similar move by konkola mine not to declare dividend was instead scorned at by a former minister of mines recently!! (Sic)
Most successful countries have two taxes; corporate and PAYE. Royalty tax, windfall taxes, property transfer taxes and withholding taxes are taxes found in dysfunctional economies. Most of these countries believe if they disguised the names of taxes they will be able to collect more taxes. Taxes in a country should be few and consistent. To a business entity you can have many names but an investor or business will aggregate all and call it one tax. It is on this basis that one decides to enter into business…
The Misconception of taxing the Mines….
The mines production worth $5 billion dollars to GDP is only 12 % of our 40 Billion total income of the Zambian economy (GDP).So why do we believe that squeezing this small sector of the economy will bring benefits to our country that will surpass the other 88% of our income? Sadly it can only be flawed thinking by our minister of finance. We are killing the golden goose that lays the golden eggs.
The mines $5 billion income brings in foreign exchange that enables us to afford our imports. The mines forex supply is a whopping 80% of our total import bill. Any messing with this mining sector the kwacha can only dance to become the worst performing asset in the world. It was second worst in the world not a long time ago and no one learnt anything.
The dark side of the mine saga….
Allegations of mines stealing our wealth are ludicrous. Transfer pricing cannot take place because ZRA won’t allow any transaction that doesn’t reflect the true price of copper. And External Auditors have easily reconciled the gross figures earned by the mines by verification of the total income with average prices earned this will give one the total production exported. The total figure is further verified with ZRA records an institution that records and approves each truck of minerals exported.
It is worth mentioning numerous audit teams have investigated the mines and found no smoking gun .The dark side of this episode is the withholding of these reports from the general public by the very govt .accusing the mines of dishonesty.
Someone is trying to divert attention from the real reasons why this economy is not growing as expected. Blame the foreigner! it appears the second republic gimmick is with us again.
The govt. should immediately remove retrogressive taxes .Taxes like Royalty tax and property transfer tax should be scrapped. Parliament should never be allowed to set fiscal and monetary policies of the country they are too ill qualified to do so.
Introduce a 10% rule for both corporate tax and PAYE. The present level of 30% is too high for both taxes. It only leads to the majority of Zambians not registering to pay taxes. Unconfirmed reports from ZRA puts the figure at 3% the number of Zambian owned businesses registered for taxes. 90% of farmers who form 60% of the economy are not registered at all. In Europe such misfits are simply locked up….