INSIGHT: Workers tax demand genuine, requires soul searching

Mnadhimu wa Kambi Rasmi ya Upinzani Bungeni, Tundu Lissu (kushoto) akizungumza na Waziri Mkuu, Mizengo Pinda ndani ya ukumbi wa Bunge mjini Dodoma. Picha na Maktaba

In Summary

• It is estimated that there are about 15 million potential tax payers in this economy.
• Only about 1.6 million, which is a mere 10.7-per cent of them, do actually pay tax.

ECONOMICS MADE SIMPLE - 

Traditionally, Workers’ Day marked across the globe on May 1 each year is accompanied by a number of demands from workers.

The demands include better working conditions, decent jobs, freedom to join trade unions and salary increments, including basic pay and fringe benefits that afford them a decent living.

During this year’s celebrations, Tanzanian workers demanded, inter alia, tax reduction. The economic rationale and implications of this demand are outlined in what follows.

Low pay

Most workers especially those working in the public sector get low wages and salaries, which are too low to earn them a decent living or remove them from the working poor category.

Other forms of remuneration include fringe benefits such as transport, housing and medical allowances that are normally not available to most middle and low level employees.

Even when available, they hardly reflect prevailing and highly dynamic market rates and real costs for such goods and services.

Since employers pretend to be paying their employees, the employees in turn pretend to be working partly as a result of low morale and incentives in form of better remuneration.

High cost of living

The cost of living can be measured by the quantity of money needed to purchase a given basket of goods and services.

In an inflationary-ridden economy, where real remuneration does not adjust upwards with frequent rise in inflation, the cost of living is bound to increase.

    

 

This is easily reflected in the number of days that one’s monthly payment exists assuming the consumption of just basic goods and services.

Although inflation may seem to decline in figures in the consumer price index (CPI), in real terms most workers would testify to have experienced the increasing cost of living.

House rents, transport costs, costs of basic foods and drinks, school fees, medical expenses and the cost of similar basic necessities have been increasing in real terms.

Tax burden

Tanzania’s actual as opposed to potential tax base is generally very narrow. This is an economy where about 80 per cent of its people are in subsistence agriculture that is not taxed.

It is also an economy where about 70 per cent of the labour force is in the informal sector that can hardly be captured in the tax net.

Also characterising Tanzania’s fiscal regime are arguably very generous tax exemptions and incentives.

Various reports would show that tax exemptions are to the tune of about 26 per cent of collected revenues.

Whereas it is estimated that there are about 15 million potential tax payers in this economy, it is estimated that only about 1.6 million, which is a mere 10.7-per cent of them, do actually pay tax.

In this long litany, one would add many tax evasions and avoidance using various legal and illegal techniques including, but not limited to capital flight.

The implication of all these is that those who can be easily identified and taxed have to shoulder the inevitable tax burden. These mainly happen to be workers in the formal sector in the public, private and civil society sectors.

They, therefore, have to shoulder the huge tax burden by way of many taxes and high rates of the same.

This reduces their disposable income and lowers standards of living other factors being constant. Now that the tax burden is already very heavy on workers’ shoulders, it is only reasonable to consider reducing the same.

Implications

There are many and far-reaching economic and other implications of reducing taxes in a country like Tanzania.

Reducing workers’ taxes as demanded by workers in May Day celebrations in Tanzania implies revenue loss to the government.

By extension, it implies reduced ability of the government to provide public goods and services such as health, education, water, infrastructure, security, peace and tranquillity.

When the government is unable to provide all these, there will most likely be discontent amongst citizens, including workers.

The discontent can be manifested in many ways, including demonstrations. The Arab spring and many demonstrations in the Euro zone following austerity economic measures would testify to this.

However, these do not justify not listening to the workers’ grievances. Fortunately, tax reduction is feasible.

Way out

Workers do need and deserve tax reduction. However, the government needs these taxes to finance public goods and services.

The good thing is that there are many other potential and actual sources of government revenue rather than just taxation.

Among the ways of filling the revenue gap that could be created by reducing workers’ taxes is to optimise other possible sources of public finance.

These include tax revenue other than that levied on workers, various non-tax revenue, careful foreign and domestic borrowing and foreign aid.

Non-traditional sources of public finance include sovereign borrowing just as Rwanda has done, a special infrastructure facility, sovereign wealth funds and pension funds, taxation of financial transactions, carbon trading and carbon tax, voluntary initiatives and super-profit tax on minerals.