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Taxing us to the bone

ORDINARY Zimbabweans should brace for tough times in the months ahead.

Zimbabwe Independent Editorial

If Finance minister Patrick Chinamasa’s recent excise duty hike on fuel is anything to go by, consumers are set to bear the brunt of price increases as producers and importers pass on the costs to the already struggling end-users in a bid to maintain profitable margins.

Putting aside the current beer price reduction, Chinamasa’s fiscal measures are likely to trigger price spikes.

The minister last week raised excise duty on diesel and petrol from 25US cents and 30US cents per litre to 30US cents and 35US cents per litre respectively, with effect from Monday. The toxic impact of this is yet to be felt, but it’s coming.

Apart from the duty hike on fuel, Chinamasa also levied excise duty of 5% on airtime for voice calls and data. He even charged customs duty on mobile handsets at a rate of 25%, from October 1, at the same time hiking government property rentals.

While all these were desperate efforts to raise additional revenues for government as its tax base shrinks, the upshot will be harmful. People and companies can’t withstand such a taxation siege any more. They are feeling the pain of being taxed to the bone.

The increase in excise duty on fuel will also fuel the cost burden for most companies. This, in an environment where consumers are already reeling from liquidity problems and plummeting disposable incomes and hence low aggregate demand, is too harsh.

In a situation where companies are even reducing prices to encourage sales, the rise in fuel costs will further squeeze margins, while forcing price escalation.

Chinamasa also increased duty on a wide range of imports of finished products, including cooking oil, poultry, soap, maize meal, flour, beverages, dairy produce, furniture, sugar, fresh and canned fruits and vegetables, among others, saying they were accelerating local industry collapse and ballooning the country’s bloated import bill which stood at US$3 billion in the first half of 2014.

Protectionist measures, given structural economic inefficiencies and that production has virtually collapsed, won’t work. How do you protect industries that are virtually collapsing or don’t exist, or indeed why protect inefficient or moribund companies?

This is likely to raise prices as local companies are not competitive owing to obsolete equipment, low capacity utilisation and high cost structures. Foreign companies which continue to export here will pass on the cost to consumers.

The increase in excise duty on fuel may adversely fuel cost-push inflation against a backdrop of company closures, unemployment and tumbling disposable incomes.

Import tariffs won’t help to deal with fundamental problems — structural issues and policy inconsistencies — affecting the economy. Quite often they harm the very people they are meant to protect.

Protectionism results in deadweight loss; excessive burden of monopoly and taxation or allocative inefficiency — loss of economic efficiency — in which no-one enjoys any benefits.

As Alan Greenspan would say, such measures create an atrophy of competitive capacity. If Chinamasa’s protectionist route is followed, newer, more inefficient industries will be protected but with less scope to expand, and overall production and economic efficiency will suffer.

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