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The Tax Puzzle: Burdens and Deficits
The Tax Puzzle: Burdens and Deficits

By - Kiraithe Daniel Mutemi

Posted - 19-02-2020

Most African governments have recently been on the receiving end for heavily borrowing to finance their budgets. The credit appetite, especially from the East, seems to be accelerating and other world leaders are getting interested in the African borrowing culture. It seems the focus is mainly on the expenditure side when citizens demand budget allocation to projects. They do not care where the government gets the money from. All they want is good roads, schools, jobs, electricity and even food from the government. After all, every citizen knows governments are ‘rich’. They do not get broke like citizens. Do they?

Let us shift attention to government sources of finances. The major source of any government source should be from taxes. Citizens fund their projects and that is how governments remain with money always. As long as it has citizens, the government can never lack money. From a layman’s perspective, the government funds people. But from another man’s view, people fund the government. While the governments seem to be making efforts to collect taxes to fund their operations, there seems to be a systemic problem in the collections made. Most of the African governments are left with the option of borrowing to finance their projects. The tax targets and budgets drawn by Africa seem to be highly uncorrelated as they should be. Deficits exist and may be inevitable. However, the fundamental question is how do we bridge the financial gap by reducing tax deficits to fund our budgets?

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To arrive at a viable solution we must assess our challenges in tax collection. Are our targets unrealistic or our expenditures too ambitious? Cases of tax evasion are common in many countries and they significantly reduce the revenues collected. Corruption in the revenue collection bodies is equally rampant and consequential but it can be fixed.

According to a report by United Nations Economic Commission for Africa (UNECA) (2018), it is asserted that at least $50 billion is lost by African countries annually to illegal financial outflows, mainly through tax avoidance and evasion. Ironically, the wealthiest people are associated with tax evasion. What can $ 50 billion do for a continent facing a myriad of problems ranging from inadequate food, climate change, and deplorable infrastructure among other paining issues?

Sub-Sahara Africa countries can boost their revenue collection by 5% mobilizing the domestic resources optimally. This claim by IMF means domestic resources could thus be ignored yet they are capable of raising our tax revenue by such a margin. The existing policies are also to blame as they can only yield a growth rate of less than 4%. Compared with expenditure growth, the deficits are set to widen if nothing is done to increase tax collection. IMF’s revelation that Sub-Sahara African has the lowest tax frontier in the world (7.5% lower than all other regions in the world) is even more worrying. This data means the maximum tax revenue level achievable by the countries in this region is far below the average of the rest of the world.

The performance of tax collection as measured by the tax-to-GDP ratio reveals how much a country collects relative to the earnings. Looking at the population and the tax collected in a country can reveal how good the people could be paying taxes or otherwise. A country with more people could be expected to collect more taxes than the one with few people. But that does not happen always as there are factors that could affect the ability of the people to pay. The tax-to-GDP ratio thus best sheds light on tax collection performance. A low ratio means little tax is generated from much earning.

Nigeria’s tax-to-GDP ratio is less than 6% yet it has the largest population in the continent. It has some of the wealthiest individuals and a remarkable entrepreneurial culture. However, the government gets less than 10% of its GDP! Possible reason? Tax collection weaknesses such as tax evasion and poor business registration mechanisms to bring on board all individuals and businesses to pay taxes. In absolute figures, Nigeria collected $ 28 Billion in 2018 from 195 million people with the world bank indicating there were 65 million economically active citizens but official data showed only 19 million people paid taxes to the federal government. At the same time, South Africa collected almost double the amount ($ 57 billion) despite having less population. Her tax-to-GDP ratio is 25% meaning the country collects more in absolute terms and relative figures.

Some countries have a worrying budget deficit as a percentage of GDP. The data below ( ranks 4 African countries in the list 10 biggest deficits. They include South Sudan, Libya, the Republic of Congo and Djibouti.

Budgets cannot be financed by debts that exceed internal revenues. As countries strive to bridge budget deficits by borrowing, it is equally important to address the question of low tax collections and tax revenue losses due to criminal activities like tax evasion. It is also critical for African governments to mobilize and utilize local resources. Borrowing locally can also boost the earning of local companies who can eventually pay more taxes. Investing in businesses that create jobs and wealth would be investing in more revenues by the governments. A continental tax conversation ought to take place where countries can learn from others on the way to bridge the tax collection deficits as a way of reducing borrowing to finance budgets. Collecting more tax should not be mistaken for increasing the tax burden.