Taxes are important to the proper functioning of our economy. They are the main source of government revenues used to fund various social services including our security, water, roads, health care, education and public investments to promote economic growth and development. Out of the 33 trillion-shilling Tanzania’s budget for the fiscal 2019/20, 60 per cent will come from taxes. But tax systems can impose a heavy burden on the society and more specifically on taxpayers. This article serves as an introduction to the discussions that will follow in my next few articles on the subject tax burden.
In addition to the actual tax liability, taxes tend to wreak at least three other costs: efficiency, administrative and compliance. But, before we proceed, why is the discussion of these costs important? Well, ultimately, the level of these costs is among the main factors that determine the success of a tax system. These costs are also symptomatic on the overall efficiency of the tax system. At the extreme, think of complicated tax that cannot be implemented: taxpayers cannot easily comply, and the tax authority finds it difficult to enforce despite their massive legal powers. Or, specifically, think of when high tax rates are set on advertising (billboards, posters and the like) and suddenly, taxpayers significantly cut their advertising budget. So, policymakers need to find the right balance between raising revenue and ensuring that tax rates, the cost of tax collection and the burden of tax compliance do not deter participation in the system or discourage business activity.
Efficiency Costs: Sometimes economists refer to them as “deadweight losses” or “excess burden”. The costs involve tax-induced market distortions. Simplistically, these costs arise when a tax system makes producers or consumers, or both change their behaviour to reduce their level of tax liability. Refer to my above example on advertising tax. Unfortunately, this cost cannot be eliminated in the tax system. But it can be minimised.
Administrative Costs: These are the public sector costs of administering a tax system. The costs of running TRA, for example (their salaries, pensions, offices, equipment). Also, the costs of making the tax laws from policy formulation to enactment. And the judicial costs of administration of the tax dispute resolution system (for example, the Tax Board, Tax Tribunal and the Court of Appeal of Tanzania).
Compliance Costs: Tax compliance costs are costs incurred by taxpayers in complying with the tax laws and regulations. Typically, these include the costs of labour, or time taken to complete tax compliance activities (e.g. to acquire tax knowledge, record transactions, prepare and file a return and make payment of tax). Taxpayers may also incur some costs when they engage a tax expert (at a fee) to assist in compliance activities. The costs also come from post-filing activities like tax audits and resolving tax disputes including the legal fees for litigations. Delayed VAT refunds also impose a financial burden. There is financial burden also taxpayer cannot collect VAT from customers before the due date for remittance to TRA. There are also incidental expenses such as travel (air tickets, taxis, etc.), accommodation, and postage. Sometime taxpayers may purchase software and equipment for tax compliance (for example EFDs). There are also psychological costs such as stress, anxiety and frustration as a result of attempting to comply with the tax.
But, unless these costs are known and measured (or accurately estimated), policymakers will always face a difficult challenge in formulating good tax policies.
By Shabu Maurus, Tax Partner, Auditax international.