The Essence of Taxation in Nation Building

Thu, 25 Feb 2010 Source: Baafi, Alex Bossman

By Alex Bossman Baafi

A tax is a compulsory payment or contribution made by the citizens of a country to the government for the general benefit of the country. There are two main systems of taxation levied by the government which are direct and indirect taxes. Examples of direct taxes are personal income taxes, company taxes, capital gain taxes, toll taxes, poll taxes gift taxes and property taxes to mention a few. Indirect taxes on the other hand include Value Added Taxes (VAT), Tariffs, and import and export duties. Thus taxes of all form could be levied to achieve national goals such as economic stability, equity, economic growth and protectionism. It could as well be employed to mobilize revenue into the nation coffers as reserves.

On the economic stability for example, wild fluctuations (ups and downs) in prices are very harmful for the development of the economy of the country. Declining prices for example, as witnessed during the recent Global Financial Crisis, cause depression which leads to a fall in company profits, saving, investments, employment and the Gross Nation Product (GDP). Conversely, constant rising prices (inflation) do not only create problems of discouraging savings, it makes people with fixed incomes suffer and worsens a country’s balance of payment as well as weakens incentives to improve efficiency on the part of entrepreneurs. When inflation is not checked, it becomes severe and eventually leads to the collapse of a country’s entire economy.

The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has just announced the cutting of the prime rate by 200 basis points from 18%% to 16%. This should in fact spur the commercial banks on to reduce interest rates as incentives to encourage borrowing for more investment to create jobs for economic growth. Inflation is nose diving and is currently hovering 16.8%. All these development are healthy sign of economic stability for eventual economic growth which signifies improvement in the general well-being of the people living in the country. The one year administration of the current government has witnessed a contraction of the economy so far with GDP fallen from 7.3% in 2008 to 4.6% in the year ending 2009. A lot of efforts went into the stabilization of the exchange rates and a reduction in inflation had culminated in the lowering the prime rate for the commercial banks to make more loan able funds available to the public all other thing being equal.

It is time to push for economic growth to improve upon the standard of living of our people to make inequity in the distribution of income more tolerable. Surely economic growth will also provide the challenge and causes a sense of achievement to distinguish a vibrant from a stagnant economy as was seen in the second half of the previous administration.

Much as I subscribe to the view that economic growth could be attained through the employment of taxation, I do equally share the worry that the excessive use of taxation may be counter productive. With the excessive use of taxation by the current administration, I am afraid to say that all the modest economic gains enumerated above will be shot-lived if care is not taken. For example, tariffs on food imports including rice, edible oil, and fish and poultry products were astronomically increased and took effect early this year. Its effect is about to trickle down to affect consumers shortly. There has been a drastic increase in the Roads and Bridge tolls which is still hanging over commuters. Price hikes of water (pure water) and alcoholic beverages including ‘Akpeteshie’ are about to hit headlines next month having been taxed 20%. Tariffs on electricity and water are also likely to go up also to be pushed down the throat of the ordinary man on the street. I sincerely believe that, it still beats my imagination how the modest inflation of 14.8% could be maintained in the short to medium term let alone pushing further towards achieving the MPC’s prediction of end of year (2010) inflation target between 7.5% and 11%.

In my opinion, the Social Democratic Principles of the government is becoming a mirage because all these tax initiatives are not skewed to protect the poor but rather to go a long way to further reduce their disposable incomes. Because of low incomes and mass unemployment in our society, we must carefully levy taxes and skew it towards equity. As a social democratic government, it must be part of our duty to strive towards equitable distribution of income to create peace and harmony in the society by harnessing taxation to bridge the gap between the rich and the poor. Progressive forms of taxation could be used for that matter. High utility tariffs, exorbitant road and bridge tolls averaging more than 1,000% and a tax on Akpeteshie for example will go a long way to widen the gap between the rich and the poor and will run counter to the better Ghana agenda.

In the developing nation like ours important national goals that call for taxation are not achieved by the political and economic leaders because of abuse of power, greed, widespread corruption, misappropriation and mismanagement of tax revenues that leaders excessively take from the ordinary people. We must ensure that a good tax system should not overburden the poor; it must be equitable, efficient, well accounted for and expended to achieve economic growth and development for the benefit of tax payers. This is the responsibility of the government but we have not seen any major policy initiative that aims at reducing the burden of the poor person on the street for a better standard of living instead of excessive taxation which continues milking the poor for the betterment of officialdoms.

When will the greatest injustice in tax administration come to an end? The dog chains and sachet water sellers, Taxi and Tro-Tro drivers are taxed excessively whilst Government officials drive through road toll points without paying a pesewa. Taxpayers end up paying for the rent and utilities (water and electricity) bills of government functionaries. This is a clear case of robbing Peter to pay Paul to say the least. This injustice must end because it is certainly not in the interest of the mass majority of our people.

Email: abkbossman @yahoo.co.uk

Columnist: Baafi, Alex Bossman