‘Tis impossible to be sure of anything but
Death and Taxes. So wrote Christopher Bullock in 1716, in The Cobbler of
Preston. And it’s still as true today as it was then. Last month, Finance
Minister Calle Schlettwein made public his proposed Income Tax Amendment Bill,
reiterating this fact. Naturally, this bill contains some good portions, and
some which are downright dangerous for a country in the midst of its longest
recession in history.
Why tax at all, however? Well, the easiest
answer would be to say that its funds the government. To put it into an
economic context, there are some economic goods we expect from society that
would not be provided otherwise if not provided for by government. Economic
goods can be classified as either rivalrous or non-rivalrous, and either
excludable or non-excludable.
Rivalrous goods can only be consumed by one
person at a time – think of a chair, in that if you’re sitting on it, no one
else can. Non-rivalrous goods are like a movie – just because I’m watching it,
doesn’t mean the person sitting next to me cannot. Excludable goods are those
you can prevent others from using – think of a car, where if it’s locked, you
cannot gain access to it without the key. Non-excludable goods are like the air
– no one can stop you from breathing it.
Our society and our nation depends on
several goods – marine and mineral resources, biodiversity, clean water,
transport infrastructure, sanitation, defense, just to name a few.
Unfortunately, while the free market economy is quite good at managing
excludable, rivalrous goods, there is no incentive to provide services that
could be consumed by anyone without excluding others. Yet we still depend on
them. This is the ultimate reason we pay taxes – so that we all can contribute
towards providing those resources we consume without a second thought.
Of course, some services provided by the
government are simply there because we wish our society to have them. As John
Green so famously put it, “Let me explain why I like to pay taxes for schools
even though I don’t personally have a kid in school: I don’t like living in a
country with a bunch of stupid people.”
So overall, the collection of taxes is done
for a good cause. That is not to say, however, that taxes don’t have an
economic impact. These impacts can be divided into one of two categories – it
either has an income effect, or a substitution effect. If the tax is applied to
individuals or legal entitites, taxes have an income effect – it reduces the
purchasing power of taxpayers. The substitution effect occurs when taxes are
placed on products – VAT for example. Those items that are VAT exempt will thus
be cheaper in relation to those that are not, encouraging a shift in
consumption towards those products.
So let’s take a look at some of the changes
proposed by Minister Schlettwein. In particular, some changes prepare the
country for electronic tax submissions, which in my view are long overdue. Then
there are several amendment to curb tax avoidance, which could be achieved with
the existing tax structures. In addition, the penalties for tax evasion and tax
fraud are amended to be more pertinent and scaling to the amount of tax
payable, instead of a flat N$ 2000 fine.
In addition, assessed losses can now only
be carried forward for 5 years, limiting the ability to set off losses against
future earnings and potentially accelerating tax payments of newly formed
businesses still struggling to get off the ground. For investors in those
businesses, they can expect the 10% withholding tax on dividends to be applied
to them even if they are resident in Namibia.
A welcome change is that religious,
charitable and educational institutions will now be taxed on their commercial
activities. However, this does not go far enough – we are a secular country, as
per Article 1 of the constitution, and religious institutions have for far too
long rode on the back of civil society, collecting their own forms of taxes
without being required to invest that into their communities. Minister
Schlettwein should consider having them register as charitable institutions,
and tax all non-charitable activities they engage in.
Finally, personal income tax is to be
amended. The changes, however, provides minimal while increasing the taxes at the
higher end of the spectrum. According to economic theory, income taxes would
have an income effect and a substitution effect. The income effect is simply
the reduction in purchasing power of everyone that’s taxed more harshly. Per
theory, then, since there is less purchasing power available to these
individuals, they should therefore compensate by working more.
However, in Namibia, the substitution
effect would be negated by two factors. Firstly, the Labour law limits hours of
work and overtime, preventing anyone from compensating the income effect by
increasing their hours worked at a single employer. Secondly, with our
unemployment rate being what it is, the feasibility of finding a second job
would be almost nil. As such, the effect of increasing income taxes would only
have an income effect, reducing consumption in the economy, and thus, as demand
influences supply, also reducing economic growth.
It is thus quite puzzling that Minister
Schlettwein would seek to reduce the purchasing power of the Namibian consumer
in this way, especially when the country has experienced nine consecutive
quarters of negative growth. Perhaps he is gambling that the few dollars saved
by the lower-end of taxpayers will be spent and outweigh the hundreds of
dollars not spent by the higher end. Or, more worryingly, that he’s of the
opinion that the financial condition of the Namibian government is of such a
state that it can only be saved by further strangling the economy.
