Why should I pay taxes? Because it’s an obligation

Why should I pay taxes? Because it’s an obligation

Paying your taxes is considered a civic duty, although doing so is also a requirement of the law. If you do not pay your taxes, the government agency that oversees taxes, the Tanzania Revenue Authority, will require you to pay your taxes or else face penalties, such as fines or even going to jail. Oliver Wendell Holmes, Jr. said it best: “Taxes are the price we pay for civilisation.” More specifically, taxes are the price we pay for Tanzania we love. A well-functioning revenue system is a necessary condition for a strong, sustained and inclusive economic development.

As a civil servant all my life I had neither say nor any choice since taxes are deducted from my monthly salary. My observation is that tax collection in the country is more of a confrontational process, a typical cat and a mouse (Tom and Jerry cartoon) saga. The fundamental question is what are the motivating factors that lead to tax payment willingly. In Tanzania tax revenue lies somewhere between 10 per cent and 15 per cent of gross domestic product. That’s low compared with an average of about 35 per cent for developed countries. The term “tax gap” refers to the difference between revenue collected and what could be collected. Thus there is a window of opportunity to almost double the tax revenue and reduce the tax gap.

People mostly pay taxes based on visible and tangible benefits. Taxes put out fires, keep our streets lighted, clean and safe, provide our children with quality education, provide our families with good health care, ensure our food and water are safe, create legal safeguards for businesses and employees, provide parks in other words, provide us benefits every hour of the day, every day of the year. If I do not see any measurable social benefits and most importantly an unfair tax collection system, the motivation to pay tax willingly and happily is not there.

It is the onus of TRA to ensure fair taxation. The UN Conference on Trade and Development estimates that multinationals avoid $100 billion worth of corporation tax in developing countries. Tax evasion and avoidance, tax exemptions, and inequitable rent sharing in the extractive sector are all significant sources of these tax gaps. As a result of globalisation, competition between countries to attract capital, and large grey areas created by differences in tax legal systems, transnational corporations make widespread use of aggressive tax planning and transfer mispricing in order to minimise their tax payments. These practices lead to an estimated revenue loss for developing countries that is three times greater than the amount they receive in foreign aid each year. Tax incentives still result in large revenue losses. In the extractive sector, rent-sharing agreements are often negotiated directly between companies and politicians, in a way that is often not transparent and which leads to highly favourable terms for investors at the expense of lower public revenues. Thus instead of chasing hawkers, mama lishe and the small duka walas spend more time and energy to chase multinationals to reduce the tax gap. I am not saying that the hawkers and the like should not pay taxes, all should pay taxes but pursuing them should not be the main priority activity of TRA.

In developing countries, tax systems often have a regressive effect because they tend to rely heavily on consumption taxes, like VAT and excise duty, or on import levies. The poor end up paying a relatively high amount of tax because they spend all their income on goods subject to VAT, such as groceries and phone credit. And they pay import levies on their mobiles.

It is important to broaden the tax base. Developing countries need more capacity to administer and collect more complex forms of tax, like income and wealth taxes. Apart from VAT, countries need a progressive income tax regime to ensure that the poor are not hit harder by income tax too.

Another approach to reduce the tax gap is to totally abolish the policy of awarding tax exemptions. Everyone should pay tax, no one should be tax exempted and if a genuine development partner, faith based organisations or NGOs needs tax exemption, let them pay first and have a policy of reclaiming based on justifications and TRA should be more discerning.

Tanzania can become a middle-income country earlier than 2025 if TRA broadens the tax base and increases tax collection capacity. It is only domestic resource mobilisation that will enable Tanzanians to have decent and prosperous lives, no foreign aid can do this and we all need to support the fifth phase government in its initiative to increase revenue collection.