Impact of taxes on economic growth

The initial estimates for the Tanzania budget for 2015/2016 is about Sh22 trillion. This is an increase of about Sh3 trillion as compared to last year’s budget. When presenting these estimates in April 2015, the Finance minister stipulated that about Sh13 trillion is expected to be raised from various taxes administered by the Tanzania Revenue Authority. The minister indicated that part of the revenue will be raised through a review of various tax rates and a focus on property taxes.Details of the proposed tax measures will be divulged during the presentation of the budget.

mpact of various taxes on economic growth

Overall levels and composition of taxes in an economy have effects on efficiency and long-term economic growth. The challenge has always been to have the right taxes (in terms of rates and mix) that will fast track economic growth. To achieve this, there is always a need to ensure that tax increases are made for those taxes which have little negative effects on economic growth and reduce or remove taxes which enhance economic growth through encouraging investment, employment and work incentives. Various studies conducted by the Organisation for Economic Corporation and Development (OECD) have shown that corporate and personal taxes have higher negative effects on economic growth as compared to indirect taxes such as VAT, import duty and excise duty.

The appropriate levels and mix of taxation for Tanzania

The ration of tax revenues as a percentage of GDP is about 16 per cent. Although some experts have suggested that the ratio could be increased to about 25 per cent, no recent comprehensive study has been done to confirm the actual size of the tax base. TRA statistics on Tanzania mainland taxes for 2013/2014 indicate that about 40 per cent of tax revenues were from direct taxes while 60pc were from indirect taxes.

A move towards indirect taxes

It is clear that the government has been shifting focus to consumption and property taxes as compared to income taxes (corporate and personal) save for the taxation of the informal economy. The changes introduced in the VAT Bill, 2014 and the proposed measures on property taxes for the 2015/2016 budget as discussed above provide evidence to this. Thus it is critical that the expected tax rates review as indicated by the minister for Finance maintains the same focus so as to encourage further economic growth through entrepreneurship, savings, investments etc. which will in the long term broaden the tax base and provide sustainable revenues to the government as well as employment creation.

A balance must, however, be striken on appropriate indirect taxes to discourage excessive consumption which hinders savings while also protecting the poor from the high cost of living. This is because excessive use of consumption taxes could raise GDP but they are also less progressive i.e. increases inequality thus affecting low income earners. An excessive import duty regime is also an obstacle to investment growth especially in Tanzania which has capital intensive industries and activities which depend much on imported equipment. This can also affect long-term economic growth. The anticipated measures on property taxes should also take into account the current challenges facing the sector.

Conclusion

Appropriate tax rates and mix between direct and indirect taxes is key to ensure sustainable economic growth. There is a need to conduct a thorough and formal study on the overall tax base for the Tanzanian economy, the magnitude of tax burden and the required tax mix between income and consumption taxes so as to develop appropriate tax measures which will not affect economic growth, investment and work incentives while at the same time protect the vulnerable groups against the effects of higher taxes.

Mr Makundi is a Partner with Auditax International