…Government’s tax regime and policy options
By Hilary Mare
TAX matters because it provides sustainable funding for social and economic development programmes; and it provides the nexus which binds the state to the citizen. Not only can taxation enhance Government accountability, it also provides a focal point around which interest groups (such as producers groups, labour unions, and consumer groups) can mobilise to support, resist, and even propose tax policies. In other words, taxation is a central plank of state formation and enhances the construction of interest groups in civil society.
The challenge for the design of any tax system is the challenge provided by the trade-off between equity, efficiency and growth. While taxation is necessary to finance public goods and re-distribute income, the process through which a Government collects tax can entail substantial costs in terms of efficiency.
In the case of Namibia, the greatest problems facing the national tax system is the problem of tax evasion and tax avoidance and it should be noted that a country facing an increasing amount of tax evasion and tax avoidance is likely to exhibit a low productive investment mix which would mean low economic growth and the public run enterprises would be negatively affected.
With this challenge exacerbating the revenue crisis that Government faces, treasury responded last week with Finance Minister Calle Schlettwein saying: “The Ministry of Finance is offering an incentive programme for writing off a portion of the interest charged on outstanding tax, as well as penalties, in the event that all taxes (the full outstanding tax amount/s) are paid and 20 percent of the interest levied is paid, between the period of 01 February 2017 and 31 July 2017. Taxpayers with delinquent accounts and persons (individuals and companies) that qualify to register for any tax type but did not do so are offered this once-off opportunity to become compliant with tax laws.
“The incentive programme for the payment of tax, write-off of a portion of the interest and waiver of penalties takes effect from 01 February 2017 and ends on 31 July 2017. Payment for the full tax amount and 20 percent interest must be made not later than 31 July 2017 for one to benefit from the incentive programme. No tax amount will be waived. Penalties will be waived in full and 80 percent of the interest amount, provided the tax amount and 20 percent of the interest are paid and eligible tax periods are those where an outstanding debt on any tax account exists up until the end of 31 July 2017.”
With this move seen as a direct response to the tax collection dilemma it is worth noting that empirical evidence has shown that the uncooperative and unprogressive attitude of citizenry towards tax payment results in major financial problems for Government. It is an agreed fact that payment of taxes is among the basic things needed for the survival of any society and more so for Namibia which is at a major transitory stage in her quest for industrialisation and provision of amenities for her citizens.
With very little doubt, non-tax compliance as seen in the northern parts of Namibia is central to fundamental issues in public economics. Its most obvious impact is to reduce tax collections, thereby affecting the taxes that compliant taxpayers face and the public services that citizens receive. This is why after this reform U-turn and post the six months amnesty period, Government has to expend resources to detect, measure, and penalise noncompliance and this is because noncompliance alters the distribution of income in arbitrary, unpredictable, and unfair ways for Namibia.
Of further interest is the fact that, the midterm revenue collected amounted to N$24.7 billion, equivalent to 42.7 percent of the budgeted revenue of N$57.9 billion, compared to 44.2 percent collection rate achieved in the previous corresponding period. The budget execution rate by the end of September 2016 stood at 40.4 percent, compared to 42.3 percent execution rate for the corresponding period. Government revenue was therefore adjusted downward by N$6.23billion.
In the budget review, Government spending was reduced by N$5.5 billion, bringing the budget deficit as percentage of GDP below the national target of five percent, from 8.3 percent to 4.3 percent. However, the minister cautioned that this could worsen to 7.6 percent if no timely action is taken to contain current expenditure. This is well below the national target of five percent. Notably too was the further downward revision of the benchmark in respect of the budget deficit to GDP ratio from 5 – 3 percent for the rest of the MTEF period. This, in our opinion, is very positive in ensuring that the fiscal position is improved over the MTEF period. In fact, the maximum celling for the indicative expenditure for FY2017/18 was revised down from N$69.9 billion to N$59.9 billion.
Possible Policy Options
One of the key objectives for low-income countries such as Namibia is to widen the tax base. This is important since a wider tax base would reduce the necessity of ‘squeezing’ those already paying taxes. The dominant approach to improving tax collection has been to focus on enhancing administrative capacity. Administrative constraints are often identified as the main constraint to the ability of states to collect revenue in general and direct taxes such as income tax in particular.
While identifying administrative constraints needs to be central when designing short-term tax policies, the longer-run goal of improving tax capacity (and therefore state-building) also needs to be part of policy interventions. There are many shortcomings to the administrative approach. First, the conception of capacity is static. There is no attempt to explain why and how administrative capacities change. Second, there is no explanation as to why tax capacities differ. Third, there is often little analysis as to why sound tax policies are not enforced.
Perhaps most importantly, a purely administrative approach often treats tax collection as an isolated capacity. However, it is well known that many people often evade taxes because they do not trust that the Government will use the revenue effectively, or even worse, might appropriate them through corrupt means. Thus, issues of taxation cannot be separated from expenditure policy. A second drawback of this approach is that tax collection policy is not linked to production strategies. For example, to increase the tax take from the small business sector, tax collection should be linked with the provision of business incentives for informal firms to register as taxpayers.
While there has been considerable work on the technical aspects of tax administration, policy interventions need to focus more on the historical, political and political economy factors that influence tax reform. The reasons for a historical and political economy focus have not only to do with the abundant work on tax administration but also due to the limitations of a purely administrative approach to taxation.
Confidente. Lifting the Lid. Copyright © 2015