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Tax reforms necessary

The new government will also need to implement taxation reforms. Taxation plays a fundamental role in the mobilisation of resources for the allocative, distributive, growth and stabilisation functions of the state.

Prosper Chitambara,Economist

The current taxation regime is onerous and distortionary (with so many taxes, levies and statutory fees) seriously eroding competitiveness. While some progress has been made in tax policy and administration, it is imperative to further reduce the high marginal tax rates in order to lower the high cost of doing business and to increase real incomes among economic agents so as to boost aggregate demand in the economy.

High marginal tax rates encourage tax evasion (through illicit financial flows) and force small businesses to go/remain, informal.

For instance, in the Democratic Republic of Congo (DRC), which has one of the highest recorded rates of business taxation, it is estimated that about half of manufacturing activity is informal.

Zimbabwe must fully implement fiscal isation and make use of the devises to make sure taxes are paid on points of sale.

Evidence from Greece suggests that tax compliance rates rise as tax rates fall, with corporate tax revenue increasing to 5% of Gross Domestic Product (GDP) from 4% after the rate of company tax was lowered in 2005.

The new government will need to implement a low and flat/uniform taxation structure/regime to increase compliance, simplify the tax system and reduce avoidance and evasion. Useful lessons can be drawn from transition economies as well as from the Irish model.

There is plenty of scope for the country to expand the fiscal space base and broaden the tax base by migrating beyond broad-based taxes to alternative revenue sources.

One promising option is corrective taxes because they can promote efficiency while raising revenues. Countries such as the Philippines have introduced corrective taxes.

Corrective taxes, or “sin taxes,” are levied on goods and services that are considered bad for the individual or society at large. Examples include taxes on alcohol, cigarettes and products and activities with negative environmental consequences. Corrective taxes can improve fiscal revenues while at the same time reducing socially and environmentally undesirable activities, thereby promoting good public health.

A review of literature in many countries has demonstrated that tobacco taxes reduce tobacco consumption while providing a stable and reliable source of fiscal revenues.

The World Health Organisation (WHO) has also been advocating a sugar tax on sugar-sweetened beverages to fight the scourge of non-communicable diseases. The sugar tax, apart from reducing consumption of sugary drinks, also raises additional revenues for the treasury. On 1 April 2017, South Africa introduced a 20% sugar tax on sugary beverages.

This is part of the South African government’s strategic objective of preventing and controlling non-communicable diseases and obesity.

The new government will also need to implement debt reforms. Zimbabwe’s debt situation remains an impediment to both external sustainability and economic development.

Total public debt stock is estimated at US$13.6 billion in 2017 (80% of GDP) comprising public domestic debt stock of US$6.27 billion and foreign debt stock of US$7.5 billion. Public domestic debt grew by 70.45% to close at US$6.27 billion in 2017. The attendant burden of the debt and the debt service payments are compounded by the serious structural weaknesses of the local economy such as the lack of a diversified export base, which makes it more difficult for the country to adjust to changing world demand for tradable goods and changing production patterns. Public borrowing in itself is not bad. It becomes bad when it is unsustainable (government cannot service its debt or the debt is crowding out key development expenditures) or the loan is not used for development purposes. However, higher levels of borrowing are often a symptom of a wider and deeper systemic crisis reflecting political and economic instability especially if the debt was contracted to finance recurrent expenditure as is the case in Zimbabwe. The high external debt in Zimbabwe has also implied that external financing is not readily available.

Arrears clearance is a prerequisite for full engagement and ability to borrow from the international financial institutions (IFIs). According to seminal work by Reinhart and Rogoff (2015) published in the Journal of International Economics, there are two categories of debt reduction policies. Firstly, orthodox policies which include: enhancing growth; running primary budget surpluses; and privatising government assets. Secondly, there are heterodox polices, including: restructuring debt contracts; generating unexpected inflation; taxing wealth; and repressing private finance.

Most governments in both the developed and developing worlds, have relied on the above orthodox and heterodox approaches to resolve the debt crisis. The options of Zimbabwe are however a bit limited since we are in a multi-currency regime which implies that the country cannot generate unexpected inflation through seigniorage. Since a greater proportion of our debt is foreign/external the country faces a rollover risk which may make it difficult to restructure the foreign debt component.

The most favoured option is to have the economy grow faster in real terms than the expected market real interest rate on debt. Reinhart and Rogoff (2012) demonstrate that faster real economic growth has significantly contributed to reducing burdens after the three prior peaks in government debt loads in advanced economies over the past 2-1/4 centuries.

Another option to reduce the debt overhang is to actively run a primary surplus. This will entail increasing fiscal revenues (through, for example, taxation reforms and reforming state-owned enterprises) and reducing government expenditures. Selling off non-core government assets can also generate cash that is especially useful for an economy with short-term liquidity problems. The IMF Fiscal Monitor (October 2013) proposes the idea of implementing a 10% wealth tax in Europe as a mechanism for dealing with Europe’s overleveraged economies. Taxing wealth may however result in massive capital flight as has been experienced in many countries and, hence, may not be feasible in Zimbabwe. Measures are needed not just to reduce debt per se but, most importantly, to restore sustainable growth, productivity and competitiveness.

A stable political and economic environment is very important for improved export earnings and reduced consumption imports which, in turn, translate into a trade surplus. In turn, the trade surplus would lead to a reduction in the current account deficit and ultimately an improvement in the debt burden. Improving agricultural production and productivity will also contribute towards less dependence on food aid and imports.

Chitambara is a development macro-economist, scholar and strategist and he is based in Harare. These New Perspectives weekly column are coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES) Cell +263 772 382 852 and e-mail address kadenge.zes@gmail.com

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