Balancing Width and Depth: The Difficulty of Widening the Tax Base

Policy

• The demand for state services is increasingly putting pressure on revenues.
• There is a difference between widening and deepening the tax base, and both are problematic. 
• Many new taxes have been introduced while effective rates of tax are already high in many places. 
• Corruption is undermining revenues, preventing a moral consensus on tax.
• Effort should be focussed on corruption and evasion rather than further squeezing law-abiding taxpayers.

Recent times have seen the increased recognition of human rights in developing and developed countries. This has been accompanied by an intensified focus on governments’ ability to provide quality basic amenities, such as education, health and in some instances basic minimum social grants. Governments’ expenditures to provide these basic services have also increased in the past decade. The importance of providing these basic services to the many tends to outweigh disadvantages associated with an increased tax burden placed on the wealthy. It is equally important to ensure that the poor, or low-income earners are not subject to tax, and, where they are subject to tax, that the tax burden is not disproportionately carried by the latter, when it should be carried more by the higher-income earners.

Unfortunately, in most developing countries corruption (including unauthorised, irregular, fruitless and wasteful expenditure) robs governments of large sums of money that could be directed toward bettering the lives of citizens. In some places corruption has reached the extent that governments not only report on funds lost in corrupt activities, but inexplicably budget for such impact on the government coffers. Corruption has a direct negative impact on the tax morality of the citizenry. It makes taxpayers more reluctant to voluntarily comply with tax obligations, resulting in more tax evasion and avoidance practices. This in turn necessitates an increase in the resources required by governments to adequately administer the tax system, from providing legislation for complicated anti-avoidance measures, to developing systems that identify evasion strategies, as well as resourcing tax collection agencies to implement these measures.

A distinction needs to be immediately drawn between widening or broadening the tax base, and deepening the tax base. Widening the tax base entails including instruments in the tax base that were previously not in the system. This would include introducing new taxes, subjecting people to tax who were previously exempt, for example by lowering the tax threshold, etc. However, when government imposes taxes on the same people in respect to the same taxable activity, for example by increasing the tax rates or disallowing deductions, this counts as tax deepening. With high levels of tax saturation worldwide, widening the tax base is no longer a viable option for most countries that have already ‘out-widened’ their tax bases. The remaining option would be to deepen the tax base, which is by no means a viable option either.

Countries have increasingly been exerting pressure on taxpayers, almost frantically extracting more tax revenues to finance expenditure. These include the following:

• We have recently seen an introduction of new taxes in various countries, immediate examples of which are the plastic bag tax and carbon taxes on cars in South Africa, solidarity taxes and training taxes in Gabon, skills and development levies in Zambia, a national health insurance levy in Ghana as well as financial transaction taxes in European countries. Various countries in the Middle East, including Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and United Arab Emirates will start implementing VAT at the rate of 5 per cent from 1 January 2018.
• Other trends include the heightened general focus on taxes in countries where the economy has been affected by various economic hardships, for example in the Middle East and Nigeria as a result of drops in oil prices. Nigeria is also one of those countries that introduced measures to strengthen tax collection and administrative tools, in this case by the creation of the International Tax Unit to review non-resident company transactions for permanent establishment issues.
• Tax amnesties are being granted in several countries, including Nigeria, Tunisia and Zambia, partly resulting in the waiver of interest and penalties. Other countries such as South Africa have standard amnesties waiving penalties on self-disclosure, where the revenue authority would otherwise not discover the default. Alongside these are rules imposing the obligation to pay taxes pending objection or appeal, for example those introduced in Tanzania in June 2017.
• Other countries are clarifying their tax systems to optimise tax collections, for example effective 31 July 2017, the Ugandan tax authority clarified a law requiring all imports to pay tax before clearance from the port, and in June 2017 Kenya passed a law with the objective to provide clear regulations on all procedural aspects and provisions relating to taxes.

Increasingly taxpayers are computing the overall tax burden against the services they receive from governments, and for most taxpayers the overall picture isn’t pleasant. Some countries already have personal income tax rates in excess of 50 per cent, which loosely means some individuals pay more than their net income in tax. This happens in countries such as Zimbabwe (where personal income tax rates are 51 per cent), Netherlands (52 per cent), Finland (54 per cent), Austria, Denmark and Japan (55 per cent), Aruba (58 per cent) and Sweden (61.85 per cent). In addition to these taxes, these countries impose VAT at rates ranging from 8 per cent in Japan up to 25 per cent in Denmark and Sweden. Effectively this potentially adds 9 per cent (incremental) tax on all income assuming that money is used to buy VATable goods and services after tax. If one considers that the incidence of corporate income tax is on the consumers, and assumes that the average profit margin of corporates is 15 per cent, then simplistically individuals could effectively bear an additional corporate tax in excess of 6 per cent on goods and services procured from companies within their countries. Thus potentially you could have an effective real tax-rate in excess of 75 per cent of income.

With all these measures exhausted, at least in many countries, demands on government revenues are constantly increasing. Governments seem to have accepted that it is more difficult to target corruption than it is to collect taxes from law-abiding taxpayers. This dangerous trend has the direct effect of destroying tax morality. And instead of countries’ tax bases being widened or deepened we are likely to see an increase in tax avoidance and evasion, tax revolts and emigration of taxpayers from aggressive tax jurisdictions.

 

Thabo Legwaila is Professor at the Law Faculty of the University of Johannesburg.