Taxation and nation building - A tax justice perspective
Those stampeding the Akufo-Addo government into removing taxes, especially the Energy Sector Levy, even before the Minister of Finance has had the opportunity or prepare his government’s first budget, are either up to political mischief of completely ignorant of the principles of economic governance.
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It will certainly be reckless on the part of the government, and suicidal for the country’s economy, if the government proceeded to remove taxes without due consideration of how the resultant revenue shortfall would be compensated for.
There is, however, no doubt that the trade-offs that the new government will be settling for will be deeply embedded in ideology. The New Patriotic Party (NPP) makes no secret of its ideological positioning, which characteristically leans towards the neo-liberal economic thought, and which places much premium on capital at the expense of labour. These are the contemporary tendencies that have crept steadily into the tax regimes of right and centre right governments across the world, and have led to the shifting of the tax burden from capital to labour. This is the context within which to appreciate the NPP government’s promise to reduce corporate income tax from 25 per cent to 20 per cent, and not for workers i.e. Pay As You Earn (PAYE) category of taxpayers.
Tax burden
There is evidence to suggest, however, that in most instances, as the NPP may soon discover, the result of shifting the tax burden away from capital to labour has proven both regressive and counter-productive from an employment creation perspective. Public finances are as a result eroded, leading to a retreat of public services and public investments.
Even though one may have some reservations about the content and orientation of the government’s tax policies, that should not warrant the stampeding of the government to act irrationally, unless we want to set it up to fail. As already pointed out, it is important to understand that removal of taxes cannot happen without other countervailing measures to shore up the attendant revenue losses, and also that, these are matters that should find expression in the government’s 2017 budget and economic policy statement which is still being worked on.
Short to medium-term imperatives
Whatever reliefs that are provided in the 2017 budget, one would expect a balance that ensures an equitable allocation of the national tax burden. In other words, labour, and for that matter, ordinary citizens also deserve a fair share of the reliefs being contemplated. This is necessary to secure the goodwill of the people and to carry them along in the management of the national economy.
The 2017 reliefs must be looked at as a short-term measure, while in the medium to long term we focus on identifying and plugging loopholes and their attendant leakages in our tax administration. Studies conducted by the Integrated Social Development Centre (ISODEC) between 2013 and 2016 have revealed several ways in which a great deal of badly needed potential revenues are lost yearly through tax evasion and tax avoidance schemes, including transfer mispricing, and poorly regulated tax incentive regimes.
The granting of huge tax breaks to attract large corporations, and the vast outflow of funds from our country to tax havens, continue to undermine our revenue mobilisation potential.
We, for instance, allowed the EO Group and Sabre Oil to get away with the non-payment of capital gained tax of about US$70 million arising out of the sale of their stake in Kosmos and Tullow Oil when we could have prevented this by simply harmonising the provisions of the Petroleum Income Tax Law and those of the general Income Tax Law.
Again, we created Free Zones Enclaves and gave the companies all the tax incentives with a view to boosting exports and their associated revenues, and yet the bulk of what is produced in these enclaves, do not go for export but are sold on the local market.
We gave zero tax rating to encourage companies to locate away from the capital and big cities and yet most companies want to be based in Accra, Tema, Kumasi and Takoradi etc.
Tax policy interventions
Clearly, a lot of our tax policy interventions are not yielding the desired results, largely as a result of poor monitoring and evaluation of the effects of such purposeful initiatives.
The point I seek to make with these references is that even though the private sector must be supported to contribute to nation building, we must be mindful of the fact that private sector interest does not always coincide with government’s noble motives. The private sector can be given all the tax incentives, and yet, this will not necessarily translate into new jobs but rather higher profit margins. Such risk is higher, especially in a dispensation such as ours, where there is no statutory provision for windfall taxes. Herein lies the injustice in neo-liberal taxation policies.
Tax injustices are also suffered by many developing countries within the current world trade regime and perpetrated through the lending policies of the so-called Development Partners (especially the international Finance institutions), which insist on poor countries’ adoption of policies that aim at reducing import taxes and minimising the taxation of capital in the hope that this will increase trade and inward direct investment.
As already indicated, this view is associated with neo-liberalism and structural adjustment, and is largely unsupported by empirical evidence - no country has developed economically through free trade and low taxes. All developed countries developed on the basis of high protective tariffs, public investment, and the proportion of GDP coming from tax increases as countries develop.
The current dominant view also ignores the key objective of taxation i.e. ensuring more equitable societies and again, ensuring sustainable and durable economic growth. Taxation should be progressive and used to redistribute income and wealth in a more equitable and just manner. A poorly regulated free market results in a concentration of income and wealth both within and between countries.
Progressive taxation should try and reverse or at least reduce this trend to avoid the consequences of social disorder, conflict and violent agitations. Available evidence also suggests that tax revenue is reduced in more unequal societies, as elites are better able to avoid tax or evade tax without being prosecuted.
Tax is indeed an issue that all Ghanaians must be interested in. It holds the key to unlocking economic potentials for a country, and indeed, is a major determinant of the levels of inequality in society. That is why we should not stampede the new government into taking hasty decisions on tax waivers, but rather we must engage the administration on how best it can use this all-important tool to grow the national economy, and to spread the benefits of growth equitably.
• The writer is a policy analyst with ISODEC, a member of the Ghana Tax Justice Coalition, and Co-Chair of the Multi-stakeholder Steering Committee of the Ghana Extractive Industries Transparency Initiative. He can be reached through [email protected]
