Increasing revenue by widening the tax net while reducing the tax burden
Economic Independence is the state where an economy can fulfill and sustain its citizens’ economic aspirations and prosperity without excessive reliance on foreign capital, skills, and enterprise.
It is a significant national objective as it embodies our economic sovereignty.
The six (6) pillars of economic independence are fiscal responsibility, currency stability, infrastructure, governance, growth, and social services.
This article aims to underscore the pivotal role of fiscal responsibility in attaining economic independence as a national objective.
We will delve into H.E. Dr. Mahamudu Bawumia’s proposals on the revenue side of fiscal responsibility, which demonstrate their importance and underscore why he is the leader to guide us towards economic independence.
(All references to the government in this article are generic, not specific, referring to all governments we have had in Ghana, not any specific government in particular. The challenge of economic independence has persisted since Ghana’s independence; it is systemic and non-partisan.)
Fiscal responsibility is a set of government practices and policies for sustainable budgeting and spending.
It entails managing government revenues and expenditures without jeopardising a country’s economic stability.
Fiscal responsibility is crucial in pursuing economic independence, ensuring that our financial resources are managed prudently and our economic stability is maintained.
Ghana is currently debt-distressed and in an International Monetary Fund (IMF) program designed to help us achieve debt sustainability.
To pay off our debt, we need to reduce our expenditures and significantly increase our revenue. This is currently the most important need of the nation, and any political program that does not speak directly to this should not be acceptable.
This is our seventeenth (17th) IMF program in sixty-seven years of Ghana’s independence. On average, we seek financial assistance from the IMF every four (4) years.
We must make this our last. We also need to find a way to ensure we do not return to debt distress.
We should expect political programs to address this issue and propose mechanisms to enable us to stay solvent and to ensure and protect economic independence.
One of the main pillars of HE Dr. Bawumia’s vision and priorities is introducing a new tax system.
This is a bold move to transform public finances for the first time since our independence in 1957 and set us firmly on the path to economic independence.
This proposed new tax system could potentially increase government revenue, lower price levels, increase disposable income for those currently paying income tax, lower interest rates, increase investment, increase employment, and improve economic growth.
This proposed new tax would be a major step towards economic independence.
Why do we need a new tax system? Ghana currently gets approximately forty-five percent (45%) of its revenue from direct taxes (such as income and property tax) and fifty-five percent (55%) from indirect taxes (such as Value-Added Tax (VAT), Import duties, and Excise taxes).
Our overdependence on indirect taxes has certain disadvantages. Indirect taxes are generally regressive, meaning they take away a bigger share of the poor’s income than the rich, thereby widening income inequality.
By increasing consumer prices, indirect taxes are inflationary and reduce purchasing power, thereby increasing the cost of living.
Indirect taxes also distort market signals since by increasing prices they reduce the quantity demanded of any item, thus dampening demand and growth; the extent of this impact depends on the price elasticity or the sensitivity of demand to price increases.
Any reduction of indirect taxes should, therefore, lead to a more efficient economy.
Moreover, enforcement of indirect taxes in Ghana has historically created an entire class of rent-seeking operators colluding with some officials of collectors and regulators to create a highly lucrative industry out of tax evasion.
Another reason we need a new tax system is because the current one does not generate enough revenue.
Ghana’s tax-to-GDP ratio is 14%, which compares unfavourably to Kenya’s 17%, Senegal’s 20%, and South Africa’s 26% (2022).
This is probably due to Ghana’s large informal sector, which does not lend itself to easy direct taxation.
Another reason for the low tax-to-GDP ratio is the lack of capacity of the Ghana Revenue Authority to efficiently and effectively collect direct taxes.
Inadequacy of tax revenue has meant that governments have had to borrow to finance some of their expenditures.
This borrowing often becomes excessive with all its attendant negative consequences extensively discussed in a previous article (see ‘Economic Independence Now 3 – Cutting Our Coat According to our Cloth’)
Dr. Bawumia’s proposed new tax system consists of a simple, citizen—and business-friendly flat tax regime.
It involves a flat tax of a percentage of income for individuals and SMEs (which constitute 98% of all businesses in Ghana) with appropriate exemption thresholds set to protect the poor.
It also involves inculcating a tax return filing culture in the citizenry and simplifying tax processes. There will be a general tax amnesty with this new tax system, ensuring all start from a clean slate.
Wider tax coverage and increased tax revenue
Implementing this policy would result in broader tax coverage and increased tax revenue. This new tax system will broaden the tax net to include those not paying income taxes.
All things being equal, this should lead to higher tax revenues for the government. Potentially, 13% of Gross Domestic Product (GDP) or $ 24 billion in additional revenue could become available.
This would be a paradigm shift in public finances and truly a game changer since it would reduce the need for the government to borrow to finance the budget.
Lower individual tax levels mean higher disposable income for current taxpayers.
Dr. Bawumia’s proposals involve a flat tax, which normally would imply a lower individual tax burden and higher disposable incomes for those currently on PAYE whose monthly taxes are deducted at source.
At the same income level, take-home pay would increase and put more money in our pockets. Those currently outside the direct income tax net would now have to pay tax and will, therefore, experience a nominal reduction in disposable income.
They would, however, benefit from the reduced indirect taxes, the general reduction in price levels, the increase in living standards, improved infrastructure, access to credit, improved social services, and improved economic and business environment to be made possible through this new tax system.
Potentially higher levels of consumption and investment.
Extra disposable incomes will typically be used for savings/investment and/or consumption. Savings would increase the pool of funds available to be borrowed for investment leading to growth through the employment of land, labour, capital, and technology.
When the extra income is consumed, particularly if spent on locally produced items, it would create demand-led growth.
Both ways should lead to economic growth and jobs. It’s important to note that creating employment opportunities at the micro-level is the surer and more achievable route to solving our unemployment challenges.
It is when the extra disposable income that would become now available is invested in small poultry farms, mushroom farms, piggeries, delivery-only eateries, online businesses, and similar micro-enterprises, each employing a few people that unemployment will disappear fastest.
Better access to credit
This new tax system, when properly implemented, could lead to better access to credit.
This is because, with the appropriate fiscal discipline, the expected higher revenues should reduce the need for the government to borrow.
With the government no longer as actively competing with the private sector for credit as it used to, banks would have to lend to the private sector more aggressively.
This could lead to a return to the President JA Kufuor era when banks reached out to customers in their workplaces to offer them loans.
Lower price levels and higher living standards
The successful implementation of this new tax system will create the fiscal space to remove certain indirect taxes. These would include VAT on electricity, emission tax, and betting tax.
This would also allow the reduction of the duties and tariffs at Tema port to Lome port levels. This could result in lower prices, affordability, and higher living standards.
This new tax system is only now possible because the digital infrastructure has been painstakingly prepared for this transformation.
The national identification system, tax identification numbers, digital address system, mobile money interoperability, SIM re-registration, internet penetration, optical fiber cabling, etc., have made this new system possible.
In his 2010 book on Monetary Policy and Financial Sector Reform in Africa, Dr. Bawumia proposed digitalization, amongst others, as the way forward for African countries, demonstrating a deep understanding of the nexus between digitalization and economic transformation.
In conclusion, this new tax system could potentially increase government revenue, lower price levels, and increase disposable income for those currently paying income tax.
It could also lower interest rates, provide better access to credit, increase investment, increase employment, and increase economic growth.
This proposed new tax is truly a game changer and would be a major step towards economic independence.
The writer, Mordecai Quarshie, is a seasoned Ghanaian politician with many years of experience in private life. You can reach him viamordecai.quarshie@gmail.com
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