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NPP’s Tax Cuts Never Achieved the Policy Intent for Enterprise Creation

The New Patriotic Party (NPP) in its 2016 manifesto pledged to make the private sector the engine of growth to stimulate enterprise creation. The government after winning the polls hurriedly reduced and abolished what it called “nuisance taxes” to pave way for the private sector to take off for industrialization. Today, the government is touting the benefits of cutting down and abolishing 15 different taxes.

The centerpiece of this tax discourse is the 1perent special import levy, levies imposed on “kayayei” by local authorities, 17.5 percent on domestic airlines and import duties on the importation of vehicular spare parts.

The total 15 tax cut and abolishment include, 17.5percent  VAT on selected imported medicines not produced in the Ghana, 17.5percent VAT on Financial Services 5 percent VAT on Real Estate Sales, VAT for micro and small enterprises from 17.5 percent to 3 percent Flat Rate, import duty for all goods by 50 percent and 30 percent for vehicles, Excise duty on petroleum,  Full corporate tax deduction for private universities who plough back 100 percent of profits into the university.

Others are the, National Electrification Scheme Levy from 5 percent to 3 percent , Public Lighting Levy from 5 percent to 2 percent, Special Petroleum Tax rate from 17.5 percent to 13 percent and Capital Gains Tax Exemption on stocks traded on the Ghana Stock Exchange or publicly held securities approved by the SEC.

With such tax reforms, it is expected that, private sector investment could surge and jobs could be created. However, the 15 different tax cuts are likely to affect the economy depending on whether there are demand-constraints or not. An aggregate demand economy is when there’s not generally adequate spending in the economy to enhance job creation. When there’s lack of this aggregate demand, then tax cuts can stimulate demand leading to employment.

However, taxes trimming are for the big corporations owned by party stalwarts and cronies and often the weakest fiscal stimulus measure for private sector growth. In this case, 13 of the tax cuts and abolishment would end up as savings in the pockets of the rich cronies instead of using that to expand businesses and enhance aggregate demand.

Most often, the benefits of tax cuts flow to company shareholders. To better put it, most tax cuts are for the cronies and party financiers who benefit from tax schemes.

In other words, tax cuts are incentives to increase investment in other areas and have the tendency to help typical Ghanaians save more to do more for business growth. With our economic situations and high family demands (dependency ratio of 102.5), post-tax returns do not increase capital investment and savings.

Even worse for the tax cut programs is the fact that, these tax cuts are not paid for by the government but instead increasing borrowing and creating budget deficit, thereby increasing debt – from GH120 Billion in 2016 to GH236.1 Billion in the first quarter of 2020.

The increase of budget deficit by tax cuts is an offset against the benefits of abolishing the “nuisance taxes”.

On the part of job creation, tax cuts are expected to increase job intake over the period. Teasing on the effect of Tax cuts as a catalyst could not lead the job creation agenda of the private sector as an expected outcome. The NPP government in the 2020 mid-year budget had created a total of 778,706 public sector jobs over 267,939 formal private sector jobs.

More jobs have been created in the public sector over the sector tipped for employment creation. This is enough to show in practice tax cuts had instead increased the wage bill of the public sector.

It is too early for the NPP government to sing praises of its tax cut reforms. Measuring the impact of tax cuts on private sector growth and capital investment for job creation will need more data and time.

It is important to get a quarterly data to start measuring the effect of tax incentives on private investment, job creation and other economic indicators. This will guide the theory and practice for future fiscal tax measures to help achieve policy intent.




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Peter Bismark

Institute for Liberty and Policy Innovation



Photo credit: Foundation for Economic Education (FEE)

2020-10-06 20:00:33

Source: ILAPI