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Africa: Taxation Key to Fighting Inequality
AfricaFocus Bulletin
April 30, 2014 (140430)
(Reposted from sources cited below)
Editor's Note
'In many countries, it is the poor who end up paying more tax as a
proportion of their income and this is just not right. When the rich
are able to avoid paying their fair share of taxes, a government must
rely on the rest of its citizens to fill its coffers. While tax
dodging goes unchecked, governments are severely hampered from
putting in place progressive tax systems - so fairer domestic tax
systems depend on global transparency measures' - Alvin Mosioma,
Director, Tax Justice Network - Africa
There are many different analyses of the reasons for inequality, and
the many proposed solutions are most often rendered ineffective by
lack of political will. But the debate on inequality is definitely
rising on the agenda world-wide, as illustrated by the runaway
popularity of the new book by economist Thomas Piketty on Capital in
the Twenty-First Century (http://www.africafocus.org/books/isbn.php?B00I2WNYJW).
Without countervailing government intervention, both Piketty's book
and recent experience agree, inequality between rich and poor will
continue to grow. The most prosaic remedy, taxation, is inevitably a
component of any effective strategy to reverse the trend. This new
report from Tax Justice Network-Africa and Christian Aid provides
considerable documentation on the inadequacies of both international
and country-level taxation systems, including systematic tax evasion
and tax systems that have regressive rather than progressive effects.
This AfricaFocus Bulletin includes the executive summary and brief
additional selections from the study, which focuses on experience in
Ghana, Kenya, Malawi, Nigeria, Sierra Leone, South Africa, Zambia and
Zimbabwe. The full 78-page report, with much country-level detail, is
available at http://www.christianaid.org.uk/resources/policy/tax.aspx
For previous AfricaFocus Bulletins on related issues, visit
http://www.africafocus.org/debtexp.php
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Africa rising?
Inequalities and the essential role of fair taxation
February 2014
Tax Justice Network - Africa and Christian Aid
http://www.christianaid.org.uk/resources/policy/tax.aspx
Executive Summary
After a decade of high growth, a new narrative of optimism has taken
hold about Africa and its economic prospects. Alongside buoyant
growth rates, there has been some poverty reduction and some positive
progress in sectors such as health and education. However, despite
this, there is a broad consensus that progress in human development
has been limited given the volume of wealth created. There is growing
concern that the high levels of income inequality in sub-Saharan
Africa are holding back progress.
This report investigates the issue of income inequality in eight subSaharan
African countries (Ghana, Kenya, Malawi, Nigeria, Sierra
Leone, South Africa, Zambia and Zimbabwe). While there is growing
public recognition that inequality is the issue for our time - both
globally and in sub-Saharan Africa - there is little definitive
analysis of income inequality trends on the continent. This report
seeks to contribute in this area, looking at whether income
inequality is, in fact, rising and in what context this is occurring.
In particular, this report seeks to locate an analysis of tax systems
in sub-Saharan Africa in the context of these economic inequalities,
given the primary importance of national tax systems in
redistributing wealth.
The report looks at national taxation systems and international
taxation issues - and, critically, the relationship between them. In
this way it reveals how the enabling environment for tax dodging
impacts on national tax systems in sub-Saharan Africa. It also
dissects the trends in revenue generation, tax equity and tax reforms
across the eight countries. It has a special focus on the experiences
of two countries - Kenya and South Africa - which have two of the
stronger tax systems in sub-Saharan Africa but which also have
extensive shortcomings in the area of tax equity.
The evidence gathered in this report shows that increasing income
inequality should be of huge concern to governments in at least six
out of the eight countries - Ghana, Nigeria, South Africa, Zambia,
Kenya and Malawi. In Ghana and Nigeria, income inequality is rising
strongly. In Nigeria, between 1986 and 2010, there has been a 75%
increase in the concentration of income in the country. In Ghana
there has been a 50% increase in the concentration of income over an
18-year period. In Zambia income inequality is now at its highest
levels since data was collected. South Africa has one of the highest
levels of inequality in the world and one which keeps increasing. The
sharp rise in the incomes of the richest 5% is driving the increase
at the top end. Yet there is no evidence of progress in tackling this
inequality, or even much preoccupation with it, in South Africa's new
National Development Plan.
It is also clear that this trend is not just a result of the rich
getting richer. There is clear evidence that this is at the expense
of the poor who are also getting poorer, and are therefore actively
impoverished in this process. To make matters worse, we know that we
are vastly underestimating the problem. As Tax Justice Network
research has shown, both wealth and inequality are being dramatically
underestimated to a very significant degree, in every study and in
every country.
In this context of rising inequality, the role of taxation in
redistributing income is particularly critical, with progressive tax
systems being one of the most important tool available to
governments. However, the report shows the extent to which illicit
financial flows undermine this prospect.
A central contention of this report is that rising income inequality
is going hand in hand with - and is ultimately caused by - the
current growth model and the illicit financial flows which have
increased significantly throughout Africa's high growth period.
Certainly the growth model has led to a concentration of wealth, but
income inequality is also being considerably exacerbated by the
inability of governments to tax the proceeds of growth, because a
large part of sub-Saharan Africa's income and wealth has escaped
offshore. Much of this is also driven by the reliance on the natural
resource sector, which is known to be rife with tax-dodging
techniques. In fact sub-Saharan Africa is suffering excessively
because of a variety of factors which combine to create the 'perfect
storm'. The dependence on natural resource extraction, and the
region's relatively undiversified economies, means a much higher
percentage of African countries' wealth is likely to be diverted by
the elites that control that wealth via opaque tax haven structures;
at the same time weak tax authorities have a much lower capacity to
confront this problem. This exacerbates the concentration of wealth
greatly.
The UK is a recognised beneficiary. A recent report from Jersey
Finance shows the extent of African assets held on the island: 9.4bn
UK pounds in customer deposits in banks (as compared to 3bn UK pounds from
China) and 31bn UK pounds in Jersey trusts (as compared to 1bn UK
pounds from China). While the UK - and a small number of Africa's
super rich - are gaining via the structure of offshore finance in
Jersey, African citizens are losing significantly.
The report also finds that, to a large degree, governments are
hamstrung in their efforts to tackle income inequality. To make
progress, sub-Saharan Africa must be able to tax its vast income and
assets held offshore. This means tackling illicit financial flows and
tax dodging in all its forms. However, as this report spells out,
there are severe limits to national level action. Systemic, global
reforms are a vital part of the answer. Progress at this level had
been haltingly slow, though recent developments have shown promise.
Yet, while discussions advance in the G8, G20 and OECD, it is still
far from certain whether African countries will be correctly included
in, and benefit from, the projects and reforms, as these are designed
to benefit G20 and OECD countries first and foremost, over the subSaharan
African countries that are most in need.
While illicit financial flows undermine the scope for African
governments to put in place progressive tax systems, tax systems have
also been heavily influenced by the tax consensus, led by the
International Monetary Fund (IMF) and supported by other multilateral
institutions, bilateral donors and tax professionals. The tax
consensus has focused on reducing corporate and, to a lesser extent,
personal income tax rates while expanding the base for consumption
taxes and value added tax (VAT) in particular. Its impacts have been
well documented and have contributed to a heavy reliance on indirect
taxation at the expense of more progressive income and wealth taxes.
...
This report also finds many shortcomings in direct taxation in the
countries studied. The personal income tax (PIT) systems lack equity
as the bulk of the burden is on employees. The self-employed rarely
pay tax. The visible lack of equity erodes citizens' trust in the
system. Often income tax thresholds are too low and do not protect
the poor. This is highlighted by the cases of Zimbabwe and Malawi,
where the poor are now eligible to pay income taxes before they earn
enough to even comply with minimum food basket requirements. At the
same time, threshold adjustments at the upper end to tax the rich
more heavily are not in evidence. In South Africa the government has
been actively reforming the PIT system so that the tax burden on
higher earners has been reduced year on year. The same yearly income
in real terms was being taxed at 33.8% in 1994/95 but only 18.2% in
2010/11. In South Africa, the Alternative Information and Development
Centre (AIDC) has estimated the annual cost of this regressive policy
at US$17bn.
Enforcement is also a significant issue. The scale of the tax evasion
problem is very evident from recent revelations regarding high net
worth individuals (HNWI) in Kenya and South Africa. In Kenya only 100
HNWI are registered with the tax authority even though the country
has 142 Kenyan shilling billionaires, whose net worth exceeds US$30m
each. Apart from the non-declaring billionaires, there are likely to
be a further 40,000 HNWI in the country who are evading tax. In South
Africa it is estimated there are somewhere between 28,000 and 114,000
HNWI who are not registered with the tax authority. AIDC estimates
that US$10.9bn in tax revenue goes uncollected in South Africa
because of HNWI tax evasion.
...
This report also finds that countries struggle to introduce new taxes
on income, wealth and property. Kenya's recent efforts to reintroduce
a capital gains tax on the sale of property and shares is
an emblematic example, with the government backtracking at speed
after private sector resistance. Equally notable is that Ghana and
Zambia have so far failed to introduce their desired windfall taxes
on mineral production. Nowhere is the failure to progress more
visible than with tax incentives. Few would now argue in favour of
tax incentives unless these are very carefully targeted in pursuit of
clear industrial policy or social and environmental goals. The
removal of those tax incentives that bring no clear benefits would be
administratively simple and would immediately have a positive and
significant impact on revenue. However, they continue to dominate tax
systems in sub-Saharan Africa, leading to huge revenue losses.
Given the many difficulties with direct taxation, reliance on
indirect taxation is still high. This continues to have negative
impacts, as demonstrated by the recent VAT reforms in Malawi and
Kenya, which will increase the tax burden on the poor. ... It is
notable that while the tax burden on the poor is rising in Kenya, the
country's elite successfully continue to resist paying taxes on the
profits made from their real estate and stock market investments.
While the report notes some signs of progress, such as some mineral
taxation reforms, there is also a clear gap between rhetoric and
reality. There is national and international consensus that it is
urgent to address issues such as tax incentives, extractives
taxation, the taxation of HNWI, tax evasion and illicit financial
flows. However, countries are struggling to introduce new direct
taxes and to enforce tax compliance against companies and elites.
Support to make such transformational changes is inadequate.
The responsibility of the international community is clear. This is
not only because of the misplaced emphasis of the tax consensus
applied by international financial institutions over the last few
decades. It is also due to the rich world's foot-dragging on global
reforms with regard to financial secrecy and tax havens. While the
global reform agenda has picked up pace recently, there remains a
serious risk that African countries will be excluded from the
processes, with benefits mainly accruing to G20 and OECD countries.
Yet, the more ambitious reforms that Tax Justice Network Africa and
Christian Aid are calling for could transform the panorama for direct
taxation in Africa.
If countries in Africa cannot tax income and wealth correctly, they
will shift the tax burden onto the poor - as this report
demonstrates. While individual governments must be held accountable
for their policy choices, the international community must shoulder a
lot of the responsibility for increasing economic inequalities and
for the shortcomings of tax systems and public finances in subSaharan
Africa.
Introduction
...
A new narrative has taken hold about Africa. From the Afro-pessimism
regularly expressed during the 1980s and 90s, the continent has
become the subject of increasing optimism in some quarters, based on
a decade of high growth rates. This is commonly noted by mainstream
economic commentators, who see that many of the world's fastest
growing economies are in sub-Saharan Africa.
Reports indicate that there have also been gains in terms of poverty
reduction and human development. World Bank poverty data shows that
in 2008 - for the first time - the average poverty rate in subSaharan
Africa fell below 50%.The most positive changes have been in
relation to education and health. Most countries have achieved
universal primary school enrolment, with rates above 90%, and nearly
half of the countries in Africa have also achieved gender parity in
primary school. The under-five mortality rate has reduced
significantly between 1990 and 2011, as has the maternal mortality
rate. ... However, despite this picture, there is a broad consensus
that progress on poverty reduction has been too limited and highly
uneven. Most countries will fail to meet most MDG targets.
Many are therefore asking how the proceeds of growth are being
shared. Is growth accompanied by decreasing inequality, with a
greater share of income going to the poor? Or is income inequality
increasing across sub-Saharan Africa? Could the type of growth that
Africa is experiencing itself be driving inequalities? There is very
little information and analysis available to answer these questions.
Inequality is, today more than ever before, a pressing issue
globally. Research in developed countries by the OECD finds that in
the three decades prior to the global financial crisis, wage gaps
widened and household income inequality increased in a large majority
of OECD countries.10 This occurred even when countries were going
through a period of sustained economic and employment growth. Public
opinion in OECD countries is certainly coalescing around an
understanding that the global system is rigged to suit the interests
of the (ultra rich) minority at the expense of the rest. The
emergence of the 99% and Occupy movements is a testament to the
strength of public feeling about inequality.
Of course, in Africa - as elsewhere - inequality is far from a new
phenomenon. Following independence, and in the decades since, wealth
has, to too great an extent, remained concentrated in the hands of
elites who replaced the colonial powers and failed to reform existing
structures and redistribute assets. Political economists such as Yash
Tandon and Samir Amin have analysed the shortcomings of global
capitalism and economic development paradigms imposed on Africa for
many years and there is a body of literature on these debates. Civil
society organisations and social movements in Africa have also long
challenged the traditional growth model, the narrow focus on foreign
investment, natural resource extraction and export-led growth, the
neglect of the agricultural sector and strategies to create good
quality jobs, grow domestic demand and develop the domestic private
sector.
Inequality is now becoming more prominent in documents and statements
emanating from pan-African bodies. In March 2012 the African
Development Bank (ADB) published a report on income inequality in
Africa finding that: 'In the 2000's six of the world's ten fastest
growing economies were in Africa, but this has not significantly
helped to equal incomes or to redistribute wealth.' The Africa
Progress Panel (APP) report published in 2012 is strongly critical of
the patterns of buoyant growth alongside increasingly visible wealth
disparities and cites equity alongside justice and jobs as a central
feature of their report. This focus continues in their 2013 report
where they look more closely at equity and the extractives sector,
including the role of illicit financial flows in worsening inequality
and poverty in Africa.
The UN Economic Commission for Africa, (UNECA), in its 2012 report,
also states that: 'Despite the acceleration of economic growth in
Africa over the past decade, however, Africans' welfare has generally
failed to improve. Social indicators have picked up only modestly,
but with unemployment, particularly among youth, remaining stubbornly
high, while income inequalities have widened'. The African Economic
Outlook's (AEO) 2013 report highlights how growth has been
accompanied by insufficient poverty reduction, persisting
unemployment and increased income inequalities.
Debates about taxation and its role in reducing income inequality are
beginning to gain traction. African civil society is calling for fair
taxation of companies, a lower tax burden for the poor, for African
assets abroad to be traced and for the African elite to be
effectively taxed. There is also a renewed interest in tax reform
from donors as aid budgets fall in these times of austerity.
But efforts to address inequality and to put in place fair tax
systems need to be significantly increased, and supported by
international processes. International taxation issues are already
clearly on the agenda of the G8, G20 and OECD and in recent months
processes towards greater financial transparency and fairer taxation
of transnational corporations have appeared to advance. However, it
remains unclear whether the rhetoric will translate into real
benefits for African and other developing countries.
...
The countries that are the central focus of this report are: Ghana,
Kenya, Malawi, Nigeria, Sierra Leone, South Africa, Zambia and
Zimbabwe. These countries were chosen as they are countries in which
TJN-A and Christian Aid's partners and members are actively
collaborating to advocate for progressive taxation reforms. While
some of these countries can provide us with some examples of good
practice, generally there is great concern over the need to ensure a
progressive taxation system is in place and the lack of progress
being made to reduce inequality.
...
South Africa - The Inequality Elephant in the Room
South Africa is a special case that deserves attention. It has
extremely high income inequality, topping the rankings for Africa and
the world in this respect. Amongst its peers - the emerging economies
of Argentina, Brazil, China, India, Indonesia and the Russian
Federation - it has by far the highest inequality levels, far
surpassing Brazil.54 Inequality in South Africa has its roots in the
country's colonial history and the practice of apartheid and as a
result, income inequality has a strong racial dimension. There have
been some attempts at redress since the end of apartheid, with
various economic development strategies including black economic
empowerment initiatives and land reform. These are seen as piecemeal
and relatively ineffective.
In fact a huge indictment of the attempted reforms is that since the
end of apartheid in 1994 income inequality has risen significantly.
Figures from the World Bank show a peak in 2006. However, analysis of
national statistics allows a more precise estimate of inequality as
income data can be used. (This is more accurate than the figures
reported by the World Bank, which are based on expenditure data, used
as a proxy for income to enable cross-country comparisons.) A
comprehensive report by the OECD, which looked at income distribution
trends and household surveys from 1993, 2000 and 2008,55 finds that
the Gini coefficient increased from 66% in 1993 to 70% in 2008, a
remarkably high figure by international standards and much higher
than the figure used in cross-country comparisons.
South Africa's income and expenditure survey from 2005/06 shows the
wealthiest 10% of the population had 51% of income, while the bottom
10% had only 0.2% and the poorest 40% accounted for less than 7% of
total household income. This corresponds to an extremely high Palma
ratio of 7.3.
Looking at trends over time, the OECD reports the share of the
richest 10% in the period 1993-2008 as jumping from 53% to 58%.
Interestingly, it also looks at the share of the richest 5% and finds
that it is a sharp rise in the share of this group that is driving
the increase at the top end. The super-rich really are getting
richer. The report also finds that these increased shares at the top
end of the distribution came at the expense of all the other income
deciles. The report further suggests that the tax-funded social
assistance programme that provides means- tested cash transfers to
poor children, old age pensioners and people with disabilities is
failing to significantly affect income inequalities as the value of
the transfers is too low.
The poorest and those dominating the lower income deciles are
predominantly black South Africans. At any poverty line, black South
Africans are poorer. This is of course a direct legacy of apartheid,
given the active discrimination in state policy, the labour market
and in relation to the provision of education, health and other
social services under the apartheid regime. Rising wage inequality is
a major factor. Most workers have experienced virtually no
improvement in their wages, with the median real wage for a formal
sector worker in 2011 being the same as it was in 1997.57 Low-skilled
workers' wages furthermore have a historic legacy of dampened wages
for black workers (who occupied these positions under job reservation
legislation) under apartheid. On the other hand, the 22.7% increase
in the average formal sector wage has been entirely due to increases
for top earners. This dramatic increase in wage inequality has been
paralleled with widespread social protests, strikes and conflict
amongst poor communities.
Of utmost concern is the approach of the South African government to
this issue. The new National Development Plan (NDP), launched in
2012, lays out the vision for the nation up to 2030. Instead of
ensuring a vision of redistribution at its heart, the NDP rests on
the acceptance of high levels of inequality. According to a
discussion paper published by the Congress of South African Trade
Unions (COSATU), the Plan only proposes a decrease 'from its current
world-beating level of 69% to an excessively high 60%.... This target
is an embarrassment for a country claiming to be serious about
combating inequality.' In fact the NDP proposes that after 18 years
of implementation, the share of income going to the bottom 40% of
income earners would have increased from the current 6% to a mere
10%. It is little wonder that some have concluded: 'the NDP
attempts to paper over the deep cracks in the structure of South
African society - to ignore the inequality elephant in the room'.
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with a
particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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