Editor
Who exactly is behind mobile money tax?
It’s clear, its opportunity cost (the economic activities forgone) is much higher than the few hundred billion shillings government is going to collect in revenues
MTN at 20 years: The government insists it will go ahead with the unpopular Mobile Money tax, despite pleas from the companies to reverse the decision
I have tried, but failed to stop thinking who exactly suggested the mobile money tax to government, in particular to the President. I have also failed to understand what the role of those responsible for tax policy at the Ministry of Finance, Planning and Economic Development (MoFPED) is, if they could not advise the executive on a policy matter as apparent as this? Could some bureaucrats now be engaging in “malicious compliance”?
For starters, malicious compliance is the behaviour of intentionally undermining one’s superior by strictly following their orders knowing that compliance with the orders will not have the intended result.
Granted, Government of Uganda (GoU) is badly looking for revenue to finance its ambitious fiscal policy. True, the structure of Uganda’s economy (which is predominantly agrarian and informal) makes it difficult for policy makers to expand tax base and increase tax-to-GDP ratio.
Granted, the GoU is under pressure to reduce borrowing and dependency on donor funds. Despite all the above, I cannot see a well-meaning economic adviser failing to convince the executive to understand that a tax structure, tax mix, and tax surcharges and other characteristics of tax system must be carefully analysed before introducing a new tax, let alone the ridiculous mobile money tax.
Well, these questions have been asked before and I guess we shall not get the answers. The reason I picked my pen this week was to put it on record that government is going to reverse its achievements by doing one avoidable thing – taxing mobile money.
Let us start by getting a few facts. The 2016/17 National Household Survey found that 78% of Ugandans fund their businesses using own savings. Asked to rank the factors affecting their businesses and impeding their expansion, Ugandans cited “lack of finance” as factor number one. Asked to mention the saving mechanism they use, a big majority of Ugandan adults reported that they keep money at a secret place at home.
What 2018 FinScope survey found
The 2018 FinScope survey conducted to track overall trends in financial inclusion since 2007, when the first survey of this kind was conducted in Uganda, found many things that a serious policy maker should interested themselves in.
First, the survey found that one reason Uganda is suffering with low levels of formal financial inclusion is the high cost of providing financial services, particularly in the rural areas and among the poorer segments of the population.
They found that microfinance institutions and banks lack the incentives, information, and sometimes the ability to mitigate perceived risks of operating beyond urban markets or with low-income clients.
In particular, the survey found that in recent years financial service providers have realised how important digital connectivity is for enhancing financial inclusion. Leveraging digital technology to reach clients that are otherwise difficult and costly to reach had led to a significant increase in financial inclusion in Uganda.
They found that digitalisation was helping to deliver financial services at affordable costs to low-income segments of the population, particularly in rural areas. The survey further found that 52% of Ugandan adults (9.7 million) had mobile phones, and that 82% of digital financial transactions were carried out through mobile money.
Regressive tax
When it came to saving, of the 3.4 million adults that saved with formal financial institutions (including banks) 2.3 million (68%) were saving on their phones, and the median amount saved on phones was as low as UGX. 30,000.
It also found that most Ugandan adults (over 7.8 million) had only their family or friends to borrow from to cover unexpected expenses, and that the creditor used the phone to send the (mobile) money to the debtor in the event they were a distance away. The average amount borrowed was UGX. 50,000.
Now, with all the above facts in consideration, how can a policy maker, let alone the President, his Cabinet and Parliament, decide to tax mobile money? Who doesn’t know that tax affects the behaviour of individuals and businesses through both income and substitution effects?
Who doesn’t know that tax induces an efficiency-reducing shift in the composition of economic activity (even holding the level of economic activity constant) away from currently tax-affected activities, such as mobile money?
Specifically, does it require one to be an economist or tax expert to know that taxes on the mobile money industry would distort the mobile money industry? Economists tell us that the structure and financing of a tax change are critical to achieving economic growth.
Although taxes may enable government to raise more revenue that may be invested in growth-stimulating activities, if the taxes are not followed by immediate spending cuts, they will likely also result in an increased government spending and budget deficit.
This in the long-term will reduce national saving (since people are deprived of incomes they would save) and raise interest rates (since borrowing might rise).The net impact on growth is uncertain, but estimates suggest it will be either small or negative.
Who pays the mobile money tax?
Taxes would only generate revenue that propels growth only if they broaden the income tax base and reduce statutory income tax rates on the median citizen (a person whose characteristics represent majority of other Ugandans). Mobile money tax does not expand the tax base. It is being paid by the group that already has been paying.
Data from mobile money companies shows that nearly 80% of the transactions originate from Greater Kampala and are received in other parts of the country. This means that the same group that is already in the tax bracket is paying the mobile money tax.
Moreover, such data also shows that mobile money was helping to redistribute income from central Uganda (where 66% of Uganda’s GDP is produced) to other parts of the country.
The 2016/17 National Household Survey I cited above showed that the proportion of Ugandans living in poverty has increased to 21.4% (8 million people), up from 19.7% in 2012/13. It also indicated that the median monthly wage (the monthly income earned by a typical Uganda) is as low as Shs. 168,000.
Yet, UBOS also found that the average household monthly expenditure in Uganda is Shs. 351,600 (up from Shs. 328,200 in 2012/13). The implication of these figures is one: the median Ugandan is worse off than he/she was in 2013. This is understandable given the slow rate at which the economy has been growing, yet population growth has stayed at 3% per year.
Why then does one raise taxes at this point in time? To facilitate economic recovery, taxes should have either remained the same as before or preferably reduced. To achieve this Government should have cut pending by fast-trucking the rationalisation.
What do the empirics say?
Uganda needs a budget neutral fiscal policy – a policy intended to stimulate long-term growth by decreasing government borrowing instead of increasing taxes. Or, if the taxes were raised following immediate cuts in unproductive government spending, then output would rise leading to economic growth.
Empirical studies have found that a 1% increase of both direct and indirect taxes combined have reduced economic growth by 0.12%. Secondly, the taxes are making government increasingly more unpopular. The free-floating anger is not unfounded – it is genuine, it fiscally driven, it is not only rage about money. It is anger about perceived injustice.
The mobile money tax was imposed without consulting the median citizen as well as business people whom it targeted. If one carefully looks for the honourable sentiments in the ongoing outrage, one can easily see where impersonal forces of change are making for personal stress.
Government had the chance to listen to the people when the tax went back to Parliament. It chose not to! Instead of ensuring that the tax system is less burdensome to the poor and the unemployed, government chose to raise additional revenue at all costs.
Economists have always taught us that a tax will only be growth-inducing to the extent that it involves (1) large positive incentive (substitution) effects that encourage work, saving, and investment; (2) small or negative income effects, including a careful targeting of tax incidence toward growth-retarding spending or saving; (3) reductions in distortions across economic sectors and across different types of income and consumption; and (4) minimal increases in, or reductions in, the budget deficit. The mobile money tax does not fulfil any of these.
Be wrong, but don’t stay wrong
I often tell my students, “Be wrong! Yes, but don’t stay wrong.” Equally, government should know that it is wrong to continue levying ridiculous taxes, such as mobile money tax, in an economy whose low income earners are using mobile technology to save and transact. It is wrong not to see that this is going to reverse the observable strides made towards improved financial inclusion.
It is wrong to think that you can transform an economy that is predominantly of micro, small and medium enterprises (MSMEs) by taxing a platform that enables them to do business. It is wrong not to see that innovations such as mobile money are helping the poor to circumvent the excesses of neoliberalism which have made it increasingly difficult for low income people (the masses) to access financial services.
It was wrong for the executive and Parliament to think that what was needed was to reduce the mobile money tax by half to 0.5% instead of doing away with it altogether. The opportunity cost of the tax (the economic activities forgone) is much higher than the few hundred billion shillings government is going to collect in revenues.
And above all, it is wrong to stay wrong. If government feared that withdrawing the mobile money tax after the popular protests would set a dangerous precedent and also affect its pride, let this terrible tax be withdrawn next financial year. There a number of other less distortionary avenues of expanding the tax base. I will suggest some in these pages next week.
Comments
