In this world, nothing can be said to be certain, except death and taxes (Benjamin Franklin, 1706-90). But very, unfortunately, there is never any convenient time for either of them. The untimely death of President John Pombe Magufuli (“JPM”) a fortnight ago is one of the greatest losses Tanzanians have endured. He is gone, but his legacy triumphs.
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 34.9 trillion-shilling Tanzania’s budget for fiscal 2020/21, about 60 per cent comes from taxes.
But tax systems can impose a heavy burden on society and more specifically on taxpayers. In addition to the actual tax liability, taxes tend to wreak at least three other costs: efficiency, administrative and compliance. There is no doubt that JPM had tax collection as one of his top priorities. In the short span of five years, TRA had five different Commissioner Generals. Apart from his emphasis on tax administration, which was reflected in increased tax collections, JPM also strongly advocated for low tax rates, equity, and simplicity. A simple tax system reduces both the costs of complying and the costs of tax collections.
But 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 of 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.
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, for example, by lowering tax rates.
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). 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., prepare and file returns). 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 a financial burden when a taxpayer cannot collect VAT from customers before the due date for remittance to TRA. Sometimes taxpayers may purchase software and equipment for tax compliance (for example EFDs). There are also psychological costs such as stress, anxiety, and frustration because of attempting to comply with the tax or deal with tax officials.
The right balance is needed. Between raising revenue and ensuring that tax rates, the cost of tax collection and tax compliance costs do not deter participation in the system or discourage business activities. Towards this end, JPM pushed for Machinga IDs and flat-rate property tax. There is still scope simplify and improve these and other taxes in our tax system.
By Shabu Maurus, Tax Partner, Auditax International.