Taxes in Africa Jude Wanniski October 25, 2003

Memo To: SSU students
From: Jude Wanniski
Re: Taxation in Africa

I thought I would skip a new lesson this week as I've devoted the weekend "memo on the margin" to the tax rates in black Africa, and how they are causing the impoverishment of most of that region. If you would like to do something really important, please forward the memo to your local newspaper editorial page, and friends and relatives who might also spread the word. I've been writing about this issue for 25 years and remain baffled as to why it gets no resonance in intellectual circles that pretend to want to help the most impoverished countries of the world lift themselves out of poverty.

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Memo To: Rep. Donald M. Payne [D NJ]

Dear Congressman: As the ranking Democrat on the Africa subcommittee of House International Relations, you probably devote more time to the problems of poverty in Africa than any other elected official in Washington. There are others who may outrank you in the GOP, but because you are an African-American and they are not, I think that makes you the man on the margin on these matters.

The reason I write today is that Rep. Charlie Rangel's office forwarded me the BBC report your staff has been circulating on how the International Monetary Fund "admits" it is "failing Africa." I thought I would read a useful apology, but find the IMF report cited concludes the only solution for the four countries it studied is for them to get more foreign aid to support their IMF-advised spending initiatives, or to RAISE TAXES. I'm afraid, Mr. Payne, high tax rates promoted by the IMF nitwits are exactly why the four countries are in such desperate shape. It made me angry reading the BBC dispatch.

As it happens, I'd been discussing the matter of taxation in Black Africa with Rangel's office and it was good enough to send me tax data it got from the Library of Congress. This week, I looked through the tax systems of the four countries mentioned -- Ghana, Tanzania, Cameroon and Mozambique -- and here is what I found:

Ghana: The top personal income-tax rate is only 30%, but that rate is encountered at an income threshold of $5400 per year. The 20% rate hits at $2700 and the 15% rate hits at $270 per year. In addition, Ghanians pay a 12.5% Value Added Tax. There is also a "wealth tax," currently suspended but which could come back at any moment. Even the cloud of a wealth tax discourages the accumulation of wealth.

Tanzania: The top income-tax rate is also 30%, but that rate is encountered at $800 per year of taxable income when the currency conversion is made to dollars. On top of this huge bite out of such tiny income, Tanzanians pay a 20% Value Added Tax (VAT) on the goods and services they buy.

Cameroon The top personal income-tax rate is 60%, which is encountered at a threshold of $12,842 at the current exchange rate. The 30% rate is met at $3424 and the 15% rate at $1200. The VAT takes another 18.7%.

Mozambique The top personal income-tax rate is 40% at $3500, 27% at $1750, and 15% at $438. The VAT is 17%.

Just for "fun," I decided to check out Zimbabwe, which has been in the news because of the political strife between blacks and whites and the collapse of the economy. The top tax rate of 45% is encountered at little more than $500 annual taxable income, and there is a 30% surcharge on top of that!! A tax on a tax! The sales tax, which is said be in converting to a VAT, is at 20% for practically all machinery and 15% for motor vehicles and most goods and services.

These are of course not the only taxes in these five countries, congressman. There are dozens and dozens of other business taxes and licensing fees in each.

IMF economists and Nobel Prizewinners may tell you the reason there is so little tax revenue coming into the tax coffers of their treasuries is that the citizens avoid the taxes by cheating. This is nonsense. The reason there is no tax revenue to support IMF spending projects is that these high tax rates cannot allow capital to form internally, much less attract investment from abroad. Why would anyone risk capital in an economy where the smallest success is confiscated? If you begin an investment footrace facing a series of hurdles each of which take another big bite out of your production, you can see before you begin that nothing will remain at the finish line. In many cases, I would bet it costs the governments more to collect various taxes on the books than they get in revenues.

The top tax rates in Africa were higher prior to the devaluation of the dollar by Nixon in 1971, which began the great inflation, but the thresholds at which they were encountered were much, much higher. That's why there was at least a modest prosperity in the 1960s in most black African countries. You should look into this if you ever hope to find the answers as to why Africa is in such miserable condition. This is how the discussion with Charlie Rangel began, when I asked him to think about why Kenya is so miserably poor and Botswana is thriving. Charlie is too busy wrestling with domestic issues at House Ways&Means, Mr. Payne, which is why I suggest you grab hold of this issue and do something about it.

Respectfully,
Jude Wanniski

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IMF admits it is failing Africa
By Martin Plaut
BBC Africa analyst

The International Monetary Fund (IMF) has admitted that one of its key African initiatives is in trouble.

In a working paper published in Washington, two of the IMF's researchers show that its programme to relieve some of Africa's poorest countries of their debt burden may not produce a sustainable economic situation. The IMF's initiative for Heavily Indebted Poor Countries was launched in 1996. Its aim was simple: to cut the mountain of debts that countries had run up, reducing them to more manageable levels. At the same time, the programme encouraged states to increase their spending on the poor - on badly needed policies aimed at building schools and paying teachers.

This study looks at the performance of 12 African countries - all of which were heavily indebted before the programme got under way. These include Mozambique, Tanzania, Ghana and Cameroon - countries chosen to represent a variety of economic conditions. The problem highlighted by the study is that half the countries sampled are estimated to be unable to raise enough revenue to pay for the spending programmes the IMF is calling for.

"As countries made progress in macroeconomic stabilisation they are now 'allowed' to increase their expenditure to address poverty reduction needs," says the report by Annalisa Fedelino and Alina Kudina. It gives Tanzania as an example. The country is projected to increase its expenditure level by more than 4% of GDP, to above 22% of Gross Domestic Product (GDP), in 2002/3 relative to the previous fiscal year. "However, based on our framework, this may result in the country's swinging back into unsustainable debt levels," the report continues.

"Unless HIPCs improve their primary fiscal positions or grant financing is sustained at current, or possibly higher, levels, debt sustainability in HIPCs may prove elusive in the long term," it says. The authors warn that the countries concerned are likely to move back into unsustainable levels of debt. Only raising taxes or getting more foreign aid will allow Africa's poorest nations to escape this fate.