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Sunday, March 25, 2012

Taxation, Global Economic Crisis and the poor

By Lord Aikins Adusei (taken from Eurodad partner TJN Africa’s Quarterly Newsletter Africa Tax Spotlight), 
The article below looks at the current global economic and financial crisis, its impact on firms, governments and the poor. It argues the crisis has generated new kinds of tax policies in both developed and developing countries that in the long run will lower inequality between the rich and the poor. The article concludes that although the poor appear to have been badly hit by the crisis they will end up being the final beneficiary if the taxes and other policies being implemented begin to bear fruit.
Taxes play an important role in the economy of many nations. In many countries taxes paid include but are not limited to Personal Income Tax, Corporate Income
Tax, Value Added Tax (VAT), Fuel Levy and Windfall taxes. These taxes help build and maintain public goods and infrastructures such as roads and railway networks, schools and universities; pay salaries of teachers, nurses, doctors, police, and soldiers; maintain law, order, peace and security of the country; and improve economic and social wellbeing of citizens; and pay debts owed to creditors. In short, taxes are essential for the running of every country. Over the last three or four years, the world has gone through and is still going through tumultuous and painful financial and economic crisis. The crisis, which began in the United States and quickly spread to Europe and other Organisation for Economic Cooperation and Development (OECD) economies, was as a result of a combination of factors including under regulation and over supply of financial products; too much public and private sector debt; near-zero interest rates that
fueled cheap credit; and asset prices that boomed and then busted. The crisis has had devastating impact on ability of firms to secure credits as banks are unwilling to lend. In fact, a number of banks have failed and with it the assets of companies and individuals who did business or saved with them. Additionally, demand for goods and services produced by firms has gone down forcing companies to close down completely or lay off workers to cut down cost. The result is that many small and major firms have seen their profits slashed and so are their taxes to government. Governments’ bailouts and efforts by Central Banks around the world to stimulate the global economy by injecting additional
liquidity have not yielded the desired results. Governments’ efforts to raise revenue through taxation have also suffered severe setbacks. As exports and imports in advanced economies slow down and businesses collapse or underperform, governments are losing corporate income tax, personal income tax and other taxes that could help them maneuver through the storm. In a recent op-Ed titled “Globalization of Protest” Columbia University Professor Joseph E. Stiglitz put the impact of the crisis this way: “Around the world, we have underutilised resources – people who want to work, machines that lie idle, buildings that are empty – and huge unmet needs” (Stiglitz, 2011). Stiglitz was referring to the cost of the crisis on the poor. Governments’ inability to raise revenue to implement social and economic programmes has been borne largely by the poor, low wage and middle class workers. In both private and government institutions there is freeze on wage increase.
That not withstanding, the crisis has elicited positive responses from people around the Globe. In India, demonstration against corruption has forced governments to act to prevent corrupt politicians and their business associates from taking bribes and evading tax. The crisis has seen the United StatesFranceand Spain acting in a coordinated fashion to stop corrupt African leaders from looting their coffers and depositing their loot in Europe and America. One illustration of such actions was the fact that Teodoro Obiang Nguema, son of Equatorial Guinea’s dictator, had his cars confiscated by French police. If auctioned the proceeds of the $5million worth of cars could help provide schools, hospitals and improve sanitation for the people in that country.
In several African countries, the soaring prices and profits for the gold, copper, oil and gasoline industry in the past years have seen governments receiving a boost in the their balance sheet. Zambia for instance has seen revenue from copper increase tremendously. African governments that have not benefited from the windfall profits from oil and minerals are proposing or have proposed a windfall tax that will bring additional revenue to the state.
In 2007, a report prepared for South Africa Treasury, Dr. Zavareh Rustomjee and his team defined windfall profits as “excess profits, of which conceptually there are two possible types: those of a temporary or cyclical nature (called “quasi rent” or “economic profits”), or more structural or permanent (called “economic rent”)” (Rustomjee et al, 2007). Thus taxes on these excess profits constitute windfall tax. According to James Muyanwa (2011) windfall tax is a tax levied by governments on certain industries when economic conditions allow those industries to experience above average profits. Companies who benefit from massive profits due to a favourable economic condition are targeted. In October of 2011, the Reuters news agency cited Ghana’s Finance Minister Kwabena Duffuor as saying. Ghana is in talks with gold miners about extra taxes, including the possibility of a windfall tax. In May of 2011, media houses inNamibia quoted Mines and EnergyMinister Isak Katali as saying that the government was looking to introduce a minerals windfall tax to enable the state to benefit more from the country’s vast mineral resources. The Energy Minister said: “It is my view that as the custodian of the mineral resources, the state should also benefit in good times beyond normal taxes and royalties” (Dontoh, 2011). AlgeriaSouth Africa,ChadGabon and Angola have already indicated that they would want to implement some kind of windfall tax that would target massive profits and use it to implement social and economic programmes to benefit the poor. Although the poor have been badly hit by the economic and financial crisis, there is hope that they will turn up to be winners if the policies begin to bear fruit


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