Let's think together: Every Sunday the World Bank in Tanzania in collaboration with The Citizen wants to stimulate your thinking by sharing data from recent official surveys in Tanzania and ask you a few questions.
The overall tax burden in a country is largely determined by the role that citizens expect the State to play in the economy. People are paying more taxes in France than in the US, not because the French are richer but because they expect more public services from their government. For this reason, no single 'optimal' tax burden can be applied uniformly.Tanzania’s tax revenues by the central government were equivalent to 15.7 per cent of GDP in 2011/12. This was higher than Uganda (12 per cent) but lower than Zambia (16.5 per cent) and Kenya (19.5 per cent).However, tax-to-GDP ratios are not fully comparable across countries, because some states might benefit from significant non-tax revenues, e.g. from natural resources, or raise a greater proportion of their revenues through local taxes.
The question that needs to be answered is whether the current tax revenue level corresponds to the aspirations of Tanzanian citizens in terms of what they expect from the State. Is the Government able to deliver sufficient public services and infrastructure with the current level of tax revenues? The simple answer is no. The gap between tax revenues and public spending has averaged about 12 per cent of GDP over the past three years. This gap has been filled by official aid and, increasingly, by commercial borrowing. However, official aid should only be a temporary financing source to help the country in a transition towards economic emergence while commercial borrowing has to be repaid by taxpayers sooner or later.
For these reasons, there seems to be a consensus in Tanzania that without further increases in tax revenues, necessary investments in education, health and infrastructure will be increasingly difficult to finance on a sustainable basis.
Looking forward, fiscal revenues from natural gas production should help. But this will not happen before seven to 10 years. A close look at the current reality suggests that Tanzania has not yet tapped its full potential to raise taxes and could pursue three complementary actions:
- Tanzania grants a vast array of corporate tax exemptions, which favor certain companies and industries, and reduce tax proceeds. Official estimates place these annual revenue losses at approximately 4 per cent of GDP in 2011/12.
- Tax revenue is generated by just a handful of firms. While there are more than 800,000 registered taxpayers today, payments are mostly generated from a few companies. Similarly, about three quarters of revenues are collected in the Dar es Salaam region.
- Tax evasion is widespread, even with indirect taxes such as the Value Added Tax (VAT), which should be easier to collect. While in principle the VAT should be collected on every shilling spent for consumption purposes, the current ratio is below 40 per cent in Tanzania against 45 per cent in Uganda, 54.6 per cent in Zambia and 57.6 per cent in Kenya.
All of this raises the following questions:
- Are Tanzanians paying too much, too little or the right amount of taxes today?
- Is the current level of taxes sufficient to finance the country's needs in terms of public services and infrastructure?
- To what extent are people reluctant to pay more taxes because of the State’s failure to deliver quality services with their revenues?
- What should be the priority for the Government in its effort to mobilize more fiscal revenues? Raising actual rates? Fighting against evasion? Simplifying tax procedures?
- Should tax policy favor strategic groups through the use of exemptions or should it be uniformly applied to all taxpayers?
Note: The statistics above are from the Ministry of Finance, IMF and World Bank databases. All are publicly available.