Memo To: Rep. Charlie Rangel [D NY]
From: Jude Wanniski
Re: Kenya and Botswana
Dear Charlie: I know you couldn’t make it to last night’s White House state dinner for Kenya President Mwai Kibaki, but I know you still have a great interest in Kenya’s economic development -- as you do with all the black African countries. Your main problem, as co-chair of the Africa Trade and Investment Caucus, I think, is that your focus is on what the United States might do to spur investment and trade with Africa, i.e., lowering our tariffs or encouraging debt relief. That’s awful hard to do, because domestic special interests in the U.S. fight you off to protect their own pocketbooks. I’ve brought this up with you before, Charlie, but the Kibaki visit offers another opportunity to bug you about the tax systems in black Africa. Here is where you can do much to help these countries expand their economies internally, in ways that don’t require handouts from American special interests or American taxpayers. Instead of sending billions in "aid," send some good advice.
Kenya is a perfect example of a country that has been hammered mercilessly by the inflation of the last 32 years, since President Nixon floated the dollar in 1971. When I visited Nairobi in 1967, its economy was in great shape, and I marveled at the obvious prosperity I could see throughout the country. What wrecked it were the devaluations of the Kenyan shilling and the great inflation they produced. As it has throughout Africa, the economists at the International Monetary Fund recommended the currency devaluations. The resulting inflation dramatically increased the progressivity of the income-tax system. The IMF helped out here as well by urging the government to balance its budget by raising tax rates even higher, along with the “bracket creep” produced by the inflation. The most recent data I have at hand indicates the per capita income of Kenya’s 29 million people is not much above $340.
Now look at the tax system: On the personal income tax, an individual pays a top rate of 30%. This does not sound that bad, but the taxpayer encounters the 30% at a threshold of $5,646 (at the current exchange rate). The 25% rate hits at $4,256, the 20% rate hits at $2,865. On top of these debilitating rates, Kenya has an 18 percent Value Added Tax (VAT). This is because the income tax collects so little revenue at these steep rates. There is also a raft of taxes faced by business and industry, including export duties, import duties, stamp duties, fringe-benefit taxes, etc. Local businesses pay a 30% corporate income tax and branches of foreign companies pay at a 37.5% rate. All of the taxes together produce $1.9 billion per year. That's pocket change to Bill Gates, Charlie. He could easily give Kenya that amount for several years and it could operate without a tax system! It would grow like crazy.
Then we have Botswana, a sizeable country of only 1.5 million in southern Africa. Its "showcase economy" produces ten times the per capita GDP of Kenya’s 29 million people. TEN TIMES, Charlie.
Now take a look at its tax system. The top marginal rate is 25%, just five points lower than Kenya’s, but the individual does not pay that rate until his taxable income is $21,413. The 20% rate hits at $17,398, the 15% rate hits at $13,383, the 10% rate at $9,368. And get this, my friend: The 5% rate hits at $5,353, which is almost where the Kenyan pays the marginal rate of 30%!!! And there is NO VAT in Botswana. Corporate tax rates are 15% for manufacturing, 25% for non-manufacturing. And all of the taxes together yield $1.3 billion in revenues! With these much lower rates and no VAT, Botswana’s government gets almost as much revenue from its 1.5 million people as Kenya does from its 29 million.
Now the professional economists who advise the Democratic Party, like Dr. Paul Krugman at Princeton and the New York Times, will tell you supply-side economics does not work!! Cutting tax rates only increases budget deficits!! He might say Botswana is lucky because it has diamond mines that produce lots of revenue. He might say that Kenya is poor because its political leaders have mismanaged expenditures. My friend George Ayittey, a black African from Ghana who professes economics at American University and votes Republican, is no better. George tells me supply-side economics only works in mature countries like the United States and Europe, and the immature countries are poor because they have corrupt political leaders! And Botswana? Dr. Ayittey says they have strong cultural roots in Botswana.
In other words, the tax system is the result of good people who shun the temptations of corruption, not the cause of a sound economy where people can afford to shun corrupt ways because they can support their families on their after-tax incomes. The Wall Street Journal editorial page recently ran an op-ed by a Nobel Laureate economist, Douglas North, who asked the question: If there are so many Nobel Prizewinning economists, why is there so much poverty? Dr. North summed it up: The corrupt politicians in the poor countries do not take the economic advice of Nobel Laureates. Can you hear me laughing Charlie?
Back in July, when all hell was breaking loose in Liberia and President Bush was thinking of sending a few divisions of Marines to stop the civil war, I wrote a memo here to Treasury Secretary John Snow. I suggested it might be a lot cheaper if he took a good look at the Liberian tax system. The civil war is the result of the poverty in Liberia, and the poverty is the result of a series of IMF programs of currency devaluations and tax increases. The 3.3 million Liberians only collected $6.5 million in income-tax revenue!!
Paul Krugman would undoubtedly say they should crack down on the tax cheats in Liberia's upper-income classes! I tried to find someone at Treasury or at the State Department or the IMF who would give me that information, but they either claimed not to have it, or, at the IMF, told me it was confidential!!! I asked Professor Ayittey if he could get his hands on the tax system and he e-mailed me the telephone number of the Liberian embassy in Washington. Alas, I had already called the embassy several times and gotten no callback from the economics attaché. Price Waterhouse, which has the information I needed on Kenya and Botswana, says they don’t do Liberia because nobody is interested in investing there. Almost all production would be confiscated by the tax collectors, so why risk investments on production?
Secretary Snow would know this, but I gather the memo I sent his chief of staff was not passed on to him, so in desperation, Charlie, I turn to you. As ranking Democrat of the House Ways&Means Committee, you not only have some clout, but also might understand that I may be right and Krugman may be wrong. You may realize with the wisdom of age and experience that the Nobel Prizewinners are blaming the politicians for the miseries of black Africa – and other parts of the impoverished world – because they can’t admit to themselves that their demand-side economic policies have been the CAUSE of the poverty. Now that you are in your seventies, why not try something different? You’ve known me pretty well over the last dozen years, so you know I’m not here pleading for tax cuts to line my own pockets. I want to help you solve a problem that has been driving you crazy for decades. At least give it some thought. I know you will at least be able to get your hands on those top-secret Liberian tax rates.
Sincerely, as always,