In democratic elections, politicians are always looking out for what they can make capital out of for public support to win power. They make the most of what you want over what you need, redefine it and put it in the basket of populism. This is sold to the electorates as campaign messages for reforms to enhance economic growth. One of these policy campaigns is the tax reforms or tax cut for private sector.
Private sector growth and development often rest on the regulations and tax system for the state. Investment may boom when there are less extractive institutions; leading to tax pruning (abolishment), less government intervention and accommodative business environment. When taxes are high and suffocate businesses, the private sector would advocate for tax cut and exemptions to enable private business to re-strategize to meet targets.
Politicians would identify these policy challenges, though relevant to macroeconomic outcome, its purpose is to lure electorates into voting them into power. Then the slogan could be “we will cut taxes on these….” for which the drivers for the tax reforms and how to implement the reforms are missing in the debate.
Tax cut are important to business growth and employment but such reforms are often used to attract votes for power. The New Patriotic Party (NPP) promised to abolish about 5 taxes to reduce the burden business. These taxes (Special Import Levy, 17.5% VAT on imported medicine not produced in Ghana, 17.5% VAT on financial services, 5% VAT on real estate sales, 17.5% on domestic airline tickets) would also slash downward government’s revenue, causing expenditure constrains. In the same other, taxes were reduced to support the private sector expansion.
The main challenge to abolishing taxes and tax cut is finding the funds to finance the abolished taxes and tax cuts. In order to finance the tax cuts and abolished taxes and because only few Ghanaians pay direct taxes, the next available option is to borrow more from both the domestic and international financial markets to meet the revenue deficits. This led to the issuance of Euro Bonds of $2 billion worth of dual-tranche Eurobonds with 10- and 30-year maturities and $3 Billion in 2020. There had been other forms of borrowing from China on the Sinohydro “Barter” deal.
In 2017, Government of Ghana extended the Extended Credit Facility of the International Monetary Fund (IMF) till April, 2019. Though the aim of the IMF’s Credit Facility arrangement was to restore debt sustainability and macroeconomic stability for employment and economic growth, the extension also has a purpose to cushion the government’s expenditure and policy credibility due to the huge tax cut abolishment and exemptions.
Government expenditure is high because of its manifesto promises of One-Constituency-one-$1 million, One-district-one-dam, Free Senior High School and many more infrastructural projects. Ghana’s has a strong tax system but driven by revenue mobilization motive over public policy standards including, transparency, accountability and credibility.
It is important to have estimated with hard data, the revenue lost on tax cut and abolishment to help put together tax reforms that could help measure the impact of such reforms. For every tax reform, the devil is in the details shepherd by government away from the citizens.
In the absence of hard data and higher expenditure of the government and after IMF, some taxes were increased including the Communication Service Tax (CST) from 6% to 9% in previous National budgets; the Luxury Vehicle Levy was also introduced.
The big question is; why do abolish and cut taxes at one point, and increase and introduce new taxes at another point? It also implies, taxes cuts were re-introduced in another form without voters being able to identify. Such is the CST and the Luxury Vehicle Levy. Tax reforms should not be used for sympathy votes when it is not backed with evidence-based scientific research.
Photo credit: Daily FT