What does it take to pay taxes? - 2
Last week, we started this series on the burden of taxation. It will touch on the efficiency costs, administrative costs and more importantly to taxpayers, the compliance costs.
The efficiency costs involve tax-induced market distortions. The administrative cost is what it takes for the government to administer the tax system.
And compliance costs are the costs incurred by taxpayers to fulfil their various tax obligations but excluding the burden of the actual tax liability.
Coincidentally, last week also the World Bank issued its latest report: “Doing Business”. The report ranks countries according to how conducive they are for doing business.
The timing of the report and how Tanzania fares globally and among its peers makes this discussion of tax burden invaluable. The ease of paying taxes (which roughly suggests the tax compliance costs) is one of the components making up the ease of doing business index. On the ‘ease of doing business index’, Tanzania ranks 141 out of 191 economies globally lagging most of its peers in the East African Community (EAC).
Rwanda ranks 38, Kenya (56) and Uganda (116). This is an improvement from last year’s 144th position, likely the fruits of the Blueprint for Regulatory Reforms that Tanzania has started to implement.
In terms of the ease of paying taxes index, Tanzania ranks 165 globally and tailing all its peers in the EAC.
On this score, Rwanda ranks 38, South Sudan (74), Uganda (92), Kenya (94), and Burundi (140). These indices and the rankings are very symptomatic of the tax and other regulatory burdens in Tanzania.
But several tax scholars contend that unlike developed economies, in the developing economies very little attention has so far been given to burdens of taxation by policymakers.
In the early 1990s, Jeff Pope, a professor of economics at Curtin University (Australia) enlisted six stages in the development of the compliance costs of taxation as a policy area. Jeff’s framework provides a good assessment tool for countries.
Phase one is denial. The tax compliance costs are hidden. There is no interest in the topic at all by policymakers, practitioners or academics.
Phase two is the professional “qualitative recognition” whereby both the tax practitioners (like accountants, tax consultants and tax lawyers) and academics recognise the compliance costs being inflicted upon taxpayers.
And they also speak and write on the subject. The “estimation and evaluation” of compliance cost is the third phase. This is when attempts in the country are made to quantify compliance costs in monetary terms from taxpayer data.
This can take place at both macro-level (all taxes for a country) and micro-level (for a tax, industry, firm or individual). An may also be aimed at identifying specific issues on compliance costs. Phase four is “policy recognition”.
This means that the government and tax administration recognise both the socio-economic and political importance of the tax compliance costs as an issue and act on it. Then phase five is “effective policy measures”.
This is when the policy, legislative and operational reforms are made and prove effective in reducing the tax compliance costs for all or targeted groups of taxpayers (say the SMEs or the micro-enterprises).
And lastly, phase six which entails the persistent monitoring of compliance costs and administrative costs. It includes the publication of compliance and administrative cost assessments for every key tax reform.
In Tanzania, already there are some few academic studies. One of them dates to 1999.
The various initiatives which culminated in the recent Blueprint for regulatory reforms signal some recognition and concerns over the regulatory burdens by policymakers.
Arguably, Tanzania is just beyond the first two phases.
