II Summary of Conclusions
- Vito Tanzi, M. Yücelik, Peter Griffith, and Carlos Aguirre
- Published Date:
- October 1981
In evaluating the adequacy of the tax systems of the sub-Saharan African countries, care should be taken to consider the trade-offs occurring during the period in which the systems have taken shape. These trade-offs have been caused by historical, socioeconomic, and political conditions.
Taxation of Imports
Heavy reliance on import tariffs for revenue has been, and still is, characteristic of many countries in the sub-Saharan region. This results from the scarcity of bases other than imports and, therefore, is to a large extent justified.
But while it must be recognized that taxation of imported goods is likely to remain an important revenue source for some time, this does not necessarily mean that all revenue should be obtained from import duties. The foremost objective of import duties should be to provide protection, with a view to developing domestic production gradually. General sales taxes and excises, applying equally to imports and domestic production, should be used to raise revenue and to improve equity, and possibly for regulatory or sumptuary purposes.
In using import tariffs as protective instruments, caution is needed to avoid overprotecting domestic industry. Excessive levels of effective protection result in low economic efficiency, but effective protection, as opposed to nominal protection, may not be easy to identify and measure. Therefore, detailed studies are needed—or at least careful consideration—of the proper scope and level of protection. Only then is it possible to restructure a particular tariff.
However, as few countries in the sub-Saharan region have rationalized their tax systems in this manner, it is necessary to keep in mind the second-best alternative, in which import duties are important revenue producers. In this situation, the use of ad valorem rates instead of specific rates, the limitation of exemptions, and the improvement of valuation methods can help to ensure proper yield and elasticity and to minimize distortions.
Taxation of Consumption
General sales taxes and excises are the two most important tax instruments that can be levied on consumption. They should apply equally to both imports and domestic production in order to avoid unintended and undesirable protection of inefficient local industries. This approach is necessary, even if no domestic production of some of the taxed goods has yet been started.
General sales taxes are likely to become the main tools for producing revenue as sub-Saharan African countries continue to develop. To avoid administrative complications and distortions in resource allocation, a general sales tax should have the broadest possible coverage and little or no rate differentiation. As to the most appropriate form of sales tax, experiences in countries both outside and inside the region would seem to indicate either a multistage value-added tax or a single-stage manufacturer-importer sales tax. In any case, economic efficiency is best served by avoiding cascading, thus making the tax neutral with respect to the number of stages in production or importation and distribution; if this is achieved, there will be no discrimination against items produced with taxable inputs or items that require a long chain of production and distribution. Several mechanisms have been used to avoid cascading. By definition, a tax on value added avoids the problem, since it allows taxpayers to credit sales tax paid on inputs against tax due on their sales. Production taxes applied by francophone countries provide for a deduction from gross sales of the value of raw materials and intermediate goods that are incorporated in the product, while most countries levying manufacturer-importer sales taxes allow producers to buy inputs tax free, to apply for refunds, or, as is done for the value-added tax, to compute a credit equal to the tax on inputs and apply it against the tax due on sales.
Equity and administrative considerations ought to preclude the levy of sales taxes on transactions relating to unprocessed agricultural goods. In most of the sub-Saharan African countries, administrative difficulties would make it inappropriate to extend multistage sales taxes to small retailers or to include small artisans and producers in the coverage of a manufacturer-importer sales tax. It is clear that the amount of revenue collected as a result of such broadened coverage would not justify the effort involved in dealing with small businesses.
Finally, mention should be made of the treatment of capital goods. It has been generally argued that exemption of these goods from sales taxation is necessary to avoid cascading, since otherwise tax would be paid on a final product whose cost would already include part of the tax payable upon purchase of the capital goods. On the other hand, the taxation of capital goods has been advocated to counteract the effects of too many exemptions granted to users of capital goods under incentive schemes and to encourage increased utilization of labor.
At earlier stages of economic development, excises can play a role quite similar to that of general sales taxes. This is particularly true in economies where the manufacturing sector is small and produces few items. In more developed economies, selective excises should supplement a general sales tax. The selectivity of excises makes them useful for emphasizing distributional goals by imposing additional levies on goods and services consumed by high-income sectors of the population. They can also be used for discouraging undesirable consumption—a feature of excise taxation which has become important in recent years from the standpoint of energy conservation. Excises should in general be imposed at ad valorem, rather than specific, rates; and if specific rates are preferred for administrative or traditional reasons, they should be subject to frequent adjustment.
Taxation of the Agricultural Sector
Because a large share of GDP results from agricultural activities in most sub-Saharan African countries, attention should be paid to the tax instruments that can be used in the agricultural sector. However, the constraints—mainly administrative—inherent in these are of such magnitude that it would not be realistic to expect much from them, especially in terms of enhancing productivity. The limited significance and potential of land taxes illustrates the point, although special land tenure systems have also contributed to the minor role of land taxation.
From the point of view of revenue, production of primary commodities for export is the most important agricultural tax base. Export duties on primary products have been extensively used by many countries in the region. Since the possibility of shifting the duties forward is limited, there is a serious risk of adversely affecting production if they are imposed without due regard to the profitability of the subsector. Negative effects on both government revenues and the balance of payments may result. On the other hand, taxes on exports could and should be used in situations where production of certain crops is clearly profitable and income taxes are not considered feasible. Implicit taxation of exports through the pricing policies of marketing boards has not worked very well in recent years, owing to difficulties in forecasting and in meeting urgent revenue needs. If, however, the marketing board approach is used, considerations similar to those for export duties are valid.
It is doubtful whether tax should be levied on the subsector related to subsistence production, and it is generally recognized that this subsector is not easy to tax. Apart from a few crude substitutes for the income tax—such as poll taxes, graduated personal taxes, and taxes on livestock—which have been found objectionable on grounds of equity and ease of administration, taxation of the subsector has generally been undertaken through levies on goods consumed by the population engaged in subsistence production. These levies are, of course, equally as regressive as the other tax instruments just mentioned but are easier to administer.
Taxation of Income and Property in the Modern Sector
The modern sector, comprised mainly of companies and individuals in urban areas, constitutes one of the most elastic components of the tax base. The present revenue yield from the sector may be relatively small in many sub-Saharan African countries, but the potential yield is large. Because of the greater sophistication of taxpayers in this sector, the income and property taxes can best be applied there.
Of property taxes, the annual levy on real property is the most important in sub-Saharan Africa, especially in countries following the British tradition. Countries following the tradition of continental Europe also rely on stamp and registration duties applied to transactions involving real estate, and some of these countries have no annual tax on property. In all cases, yield is low. Problems are raised by the variety of land tenure systems and the lack of accurate ownership records or modern real estate cadastre, complicated by inadequate administrative resources. The tax runs a serious risk of horizontal inequity and misallocation of resources in most countries.
All countries in the region tax the income of both individuals and enterprises. Countries following the continental European tradition tend to favor a primarily schedular income tax, with only a small part of revenue derived from a tax on global income; others rely more on a tax on global income of individuals and are more likely to tax income of legal entities separately from that of other enterprises—with or without integration of the taxes on corporations and shareholders. Problems arise for the individual income tax with respect to selecting the appropriate adjustment for the family unit and the appropriate level of initial exemption, and deciding whether foreign-source income and capital gains should be taxed and how withholding should be applied. Excessively high maximum rates may discourage savings and encourage evasion, while very low minimum rates yield little revenue.
Despite its relatively low revenue yield, the individual income tax has an important role to play in promoting equity, and efforts should be made to improve its structure and administration. For this purpose, introduction of a global income tax should be considered by those countries having a schedular tax system. There has been some movement in this direction.
The tax on business income presents problems with respect to choice of rates, depreciation rules, incentives to new businesses, and treatment of very small and very large businesses. Countries that are members of the Communauté Financiére Africaine (CFA) have used a minimum business tax, which can be credited against the profits tax but is not refundable, as a means of preventing underreporting of taxable profits. The taxation of business income on a current basis has been recommended mainly for removing the discrimination against other incomes (e.g., wages and salaries subject to current withholding) and for reducing the erosion of tax payments arising from inflation.
Many countries of the region also levy registration and stamp duties, poll taxes, and business license fees. The latter two may act as rudimentary substitutes for income taxes, but it is usually desirable to phase them out as the skills of tax administrators improve. Stamp and registration duties often are inappropriate in sub-Saharan Africa because of socioeconomic conditions, and most should be phased out, merged with other taxes, or at least modernized to increase their revenue yield.
Special Tax Incentives
In sub-Saharan Africa, the principal reason for introducing special tax incentives has been to encourage expansion of the modern sector of the economy. It has been argued that the immediate loss of revenue would be offset later through the effect of induced increases in domestic supply and in the size of the tax base. The most important incentives have taken the form of total or partial exemption from tax and have been granted mainly in connection with income or profits taxes and customs duties.
Tax incentives can be used to improve resource allocation. However, they should not be granted in an ad hoc manner or without careful study, if this goal is to be reached. Thorough planning is also required to avoid introducing serious inequities between individual taxpayers and between sectors.
To a large extent, tax incentives granted by a country are likely to be determined by its desire to be in harmony with its neighbors. In any event, the following comments should be taken into account. First, it is advisable to limit the duration of special incentives, both to reduce constraints affecting revenue and to allow for possible changes in the circumstances that made the incentives desirable. Second, there may be a case for limiting the amount of benefit in relation to invested capital, particularly to prevent industries that quickly become highly profitable from enjoying excessive and unnecessary concessions. Third, incentives focusing only on capital investment are less efficient than general tax holidays because of the latter’s neutrality in regard to production factors. Finally, the importance to the government of obtaining full information on revenue forgone, exemption base, and other relevant particulars from the beneficiaries cannot be overemphasized; this is the only way that the government can ensure an available data base for evaluating the efficiency of the incentives and for checking on compliance with the conditions for granting the exemptions.
General Aspects of Tax Administration
Greater attention to tax administration issues is required if tax policy goals in sub-Saharan African countries are to be attained. Proper enforcement of existing taxes would generate additional revenue and make unnecessary, or at least reduce, the proliferation of taxes. It should be noted, however, that additional revenue would be likely to accrue in the medium and long term. Only in exceptional cases (e.g., where there is a large accumulation of collectible arrears) will improved administration produce quick results.
Staffing problems are especially difficult throughout the region. Recruitment and training procedures for tax officials, as well as salary scales, need to be reviewed in order to increase efficiency of administration. Assessment and collection techniques should be improved, and systems to detect noncompliance of taxpayers and to apply adequate sanctions should be developed.
Further decentralization is also needed. Regional offices should be established, in accordance with the availability of trained staff and revenue potential, while some activities which lend themselves more readily to central administration should remain at the head office. Codification of tax laws has become indispensable in many countries if they are to make up-to-date and manageable texts available to taxpayers and tax officials.
Efforts should be made to have representatives of the tax administration participate in the work of tax planning units in charge of long-range policy studies. Such participation should help to prevent the emergence of problems when tax changes are implemented. The structure of tax departments should be carefully studied with a view to avoiding duplication of certain services, thus saving the government money and reducing the inconvenience to taxpayers. Other objectives of this study should be to provide efficient coordination between assessment and collection activities and to ensure taxpayer convenience.
Finally, since taxation has been associated with foreign domination in most countries in the region, it is important to establish satisfactory communications with taxpayers in order to convince them that the tax system is being administered fairly, that enforcement is adequate to deter delinquency, and that the money collected is being spent wisely.