Business
Can a country tax itself into prosperity into prosperity?
Traders during their meeting with President Museveni as Kololo independence grounds recently
The role of taxation in fostering prosperity is clear; the question is how much taxation is good enough to foster economic growth.
On what economic policies, proponents argue that robust taxation is the bedrock of a thriving society, providing the necessary revenue for essential services and wealth redistribution for equitable growth. Critics, on the other hand, believe that excessive taxation stifles innovation, hampers investment, and ultimately hinders economic progress.
In view of the recent protest by Ugandan taxpayers who’ve demonstrated willingness to stay a few days from their business to express dissatisfaction of what they believe is an unfair taxation regime, what options do our planners have on table.
For starters, it is crucial to acknowledge that taxation serves as the primary mechanism through which governments finance public goods and services. This ranges from infrastructure development to security, education and healthcare, among others. It’s the duty of the state to provide these public goods and services and can only be paid for by collective contributions from everyone, especially those who earn fairly more than others.
A progressive tax system and good initiatives like the Parish Development Model (PDM) can mitigate income inequality by redistributing wealth from the affluent to communities, with the aim of bringing the critical mass of the population into the wealth economy. The ripple effects are immense, including increase in production, and increased average demand. Increase in average demand translates to market expansion, employment among others.
The efficacy of taxation in promoting prosperity hinges on several key factors. Firstly, the structure and design of tax policies play a pivotal role. A well-crafted tax regime should strike a balance between generating revenue and incentivizing production and general commerce. If the tax regime discourages production, discourages trade and is difficult to administer, then it pauses challenges. Exorbitant tax rates on income, multiple taxation levels may discourage work, savings, and investment. Investors are always looking for where they can achieve a higher return on investment. In the case of Uganda and the traders, there is a general feeling and it’s somehow true that every company will need an experienced tax personnel to help with the tax administration. This includes filing the monthly returns, understanding which of the taxes; Import duty, environmental levy, withholding tax, Value Added Tax, Corporate Tax, Pay as You Earn, Local service Tax e.t.c, is paid when and where. A seemingly simple issue like VAT input and VAT output may not easily be comprehended by every elite.
I am sceptical towards the grand benefits of Tax Holidays for investors. To start with, investors prioritize good infrastructure and high-quality services for investment. They are aware governments must collect taxes in order to provide the infrastructure and services. A conducive investment environment with good infrastructure, transparent policies and streamlined implementation mechanisms are sufficient to attract investment. This is different from when they must bribe a revenue officer to obtain a tax clearance, or pay someone to help them conceal and evade taxes. Moreover, there are reported instances of exploitation wherein investors cease operations upon the end of tax holiday benefits.
The second point is on the utilization of tax revenues. Effective governance and proper fiscal management are essential to ensure that tax revenues are allocated efficiently and transparently. Investment in critical areas such as infrastructure, education, and research and development can yield substantial returns, leading to sustained prosperity. Conversely, mismanagement, corruption, lack of expertise and proper absorption capacity, unnecessary bureaucracy can squander resources and undermine the potential benefits of taxation. In our case, there is a general feeling of dissatisfaction with the ripple down effect of the taxes.
In the recent past we have seen social media being awash with pothole exhibitions on the poor state of roads, health exhibitions, the iron sheets scandals and most recent complaints of the extravagancies at parliament of Uganda.
As earlier mentioned, the global economic landscape and interconnectedness increase the complexities of taxation. Capital is highly mobile, and businesses can easily relocate operations to countries with more favourable tax regimes.
Consequently, the burdensome taxation may lead to capital flight, brain drain, and low competitiveness. There is therefore a need to strike a delicate balance between tax competitiveness and revenue generation in order to foster a conducive business growth. The resultant increase in investment and business growth in itself increases the tax base.
So, to tax or not to tax? Policy makers must find a way to ensure the taxation regime follows some key principles of a good tax. If I should pay a tax consultant an amount, say one million Uganda shillings to help me reconcile a tax of five hundred thousand, then that’s counter productive. Secondly, there seems to be a gap between revenue collectors and ensuring business survival.
From a herdsman analogy, a cow is better milked once the milkman is friendlier to the cow. I believe that investment in tax education can make the process much simpler than hiring a ground of mean looking, armed enforcement officers to check whether every vehicle, every shop is having an EFRIS generated invoice/ receipt.
Over taxation is counter production. Its some sort of autocannibalism. You can’t eat a pound of your flesh because you are hungry. The taxation system should allow for business to grow, as the planners seek for fairly acceptable ways to collect and expand the tax base.
Ultimately when taxation is thoughtfully designed and managed well, can indeed contribute to prosperity. However, excessive and misguided taxation runs the risk of stifling innovation, discouraging investment, and undermining competitiveness. As policymakers manage these complexities, a balanced approach between revenue generation, economic stimulation and social equity is key to forging a path towards sustained prosperity.
Joran Buzaabo
jbuzaabo@gmail.com
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