Making the poor even poorer through taxes
LAST week this column addressed the need for
the forthcoming 2004 national budget to contain realistic prioritisation of state expenditure. Priority must be given to the country’s most pronounced needs, foremost of which are health, social welfare, education, and facilitation of economic recovery and growth, concurrently with an overdue incentivisation and enablement of wide-ranging indigenous economic empowerment through new enterprise development.
As important as responsible expenditure budgeting and implementation of sound fiscal management policies are, it is of at least equal importance that the 2004 budget addresses some very long overdue revisions of Zimbabwe’s taxation regime. It is inevitable that government will have to source significantly greater revenues in the year ahead than previously, for the combination of inflation, soaring currency exchange rates (even if only on the parallel market, whereas a responsible government would refrain from holding official exchange rates at unrealistic levels), and critical expenditure needs, necessitate that government generates very considerable revenues.
But in seeking to obtain those increased revenues, government must not intensify the immense hardships which afflict much of the population, and it must ensure taxation policies and measures are just and equitable, and realistically interactive with the distressed socio-economic environment.
The first and most critical issue that the Minister of Finance and Economic Development, Herbert Murerwa, must resolve is the unacceptable position that government is applying direct taxes upon the minimal incomes of many of Zimbabwe’s extremely poor. Whilst the poverty datum line (PDL) now exceeds $90 000 per month, and a basic spending basket for a family of six, exclusive of any luxuries and non-essentials, exceeds $220 000 per month, Zimbabwe demands income tax from anyone whose monthly income is greater than $15 000! How can anyone justify taxing incomes which are way below the PDL? Based upon the cost of a basic basket of family requirements, and working upon the assumption — not necessarily valid — that both spouses are income earners, no monthly income below $110 000 should be subject to income tax.
Moreover, once the niggardly tax threshold of $15 000 per month has been passed, the tax bands which dictate the rates of tax rise very rapidly. In monthly terms, the present scale of rates of income tax provides for zero tax on income of less than $15 000, whilst income in excess of that amount, and less than $21 666,67 is taxed at a rate of 20%. If the income is greater than that, but less than $28 333,33, the rate on the excess is 25%. Once the income exceeds that amount, the rate increases to 30% on the excess, up to $35 000 per month. Then the rate rises to 35% on income greater than $35 000 and less than $41 666,67.
Thereafter a rate of 40% is applied to any additional income up to $125 000 per month, and all further income attracts a massive rate of 45%. So, persons earning income below the PDL pay taxes at rates ranging from 20% to up to 40% of their inadequate income. Even those fortunate enough to be earning above the PDL, but not sufficient to fund a basic basket of monthly needs, are paying income tax at rates of up to 40% of their income. For many, that tax then pushes their net income to below the PDL, whilst many others already struggling to survive below the PDL are reduced to destitution.
Although government must necessarily exact taxes from the populace to meet the very considerable expenditures which it must incur, there can be no justification for doing so by afflicting those reduced to a hand-to-mouth existence. Balancing government needs against the fundamental principles of humanitarianism and social consciousness is extraordinarily difficult but, at the very least, the tax threshold should be raised to a level that equates with the PDL. Allowing for continuing inflation in the months ahead, the absolute minimum level for the individual’s income tax threshold should be $120 000 per month, equating to $1 440 000 per annum. For the next $50 000 per month ($600 000 per annum), the rate of tax should, at most, be 10%, for even with such an increase in the tax threshold and lowering of the tax rate in the first band, the taxpayer’s net after-tax income will still be less than half of a basic consumer spending basket, necessitating that the taxpayer’s spouse be earning a like income in order that the family can sustain itself. After effecting these adjustments, the minister must then make consequential and appropriate adjustments to the other tax bands.
However, it is also necessary that the minister radically reviews income tax credits, for the impact of inflation of well over 400% in the past year has rendered the existing credits almost meaningless. The elderly person credit is a parsimonious $20 000, which does not even cover two loaves of bread a month. Many of Zimbabwe’s aged are in desperate straits. Pensions which were considered adequate only a few years ago have had their purchasing power eroded by hyperinflation to such an extent that pensioners are reduced to selling their beds, their clothing and other personal effects to live another month. Similarly, many aged who were able to retire from decades of hard work with expectations of a reasonable livelihood from income on accumulated savings now find that the interest they earn is so far below the rate of inflation that they have only been able to survive by using capital, progressively rendering them penniless.
At the very least, the elderly person’s credit must be raised to $100 000, although even that amount will still be inadequate.
The same applies to the credits for blind, mentally and physically handicapped persons, who currently receive a credit of $20 000, whilst they should receive one of at least $100 000. And the minister should consider changing the credit granted in respect of medical expenses and medical appliances, and for medical aid contributions, all of which qualify for only 50% of amounts expended. As almost all medications and appliances have an extensive import-content, the upsurge in parallel market exchange rates have radically escalated their costs, which are further inflated by the Zimbabwe hyperinflation, which has also radically increased the costs of health care services.
The ill and the infirm have also suffered the introduction of “co-payments”, in terms of which a portion of the charges for health care must be paid by the patient instead of by that patient’s medical aid society. For all but the very wealthy, costs of medical care have risen to a prohibitive degree, resulting in many reluctantly not having recourse to such care and instead reconciling themselves to continuing ill-health and potentially accelerated death. In such a situation, the least that government should do is to allow an income tax credit equal to 100% of the amounts expended on medical expenses and appliances.
Another taxation issue that requires review as a result of inflation is the iniquitous capital gains tax, which should actually be totally repealed. There are very few instances when taxpayers are realising any substantial capital gain. In practice, in almost every case, the so-called gain is actually only a numeric appreciation due to inflation and, therefore, capital gains tax is actually an inflation tax. As it is highly improbable that government will repeal the Capital Gains Tax Act, even though it should, the fiscus should rise to the occasion by introducing inflation-indexing, as has very successfully been done in a number of countries. With great magnanimity, the annual allowance for capital gains tax purposes was increased in January, from 30% of cost to 50%, but inflation in 1999 was 58,5%, in 2000 was 55,9%, in 2001 was 71,9%, in 2002 was 198,9%, and is now running at almost 500%. Thus, an allowance of 50% per annum is grossly deficient and can only be described as miserly, stingy and parsimonious.
In like manner, as long as government persists with Death Duties (in the main assessed on assets acquired from income already subjected to tax, and therefore in practice being a form of double taxation), it is urgently necessary that the rebate levels be markedly increased. When the non-dutiable levels were raised last year to $5 million in the case of decease without leaving a surviving spouse or minor children, and to $10 million in instances of a surviving spouse or minor children, those levels may have seemed reasonably generous, but that is no longer the case. Effectively, those levels currently equate to approximately $1 million and $2 million respectively. Equity suggests that such non-dutiable levels need to be at least $25 million and $50 million respectively, in recognition of the extent of inflation in the last year.
There are many other provisions of Zimbabwe’s tax legislation which must be modified to accord recognition to the massive inflation of the past year, and the undoubted continuing high inflation in the year ahead. If the minister recognises the straitened circumstances of most Zimbabweans, he will give due recognition to the impact of inflation, irrespective of the repercussive effects upon revenue collection. Those effects must be countered by privatisation of parastatals, containment of corruption, strong fiscal management and expenditure controls, and indirect taxes on non-essentials.