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Is Tanzania Raising Enough Tax Revenue?

Isis Gaddis's picture

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.

Comments

Submitted by Eliezer on
1. Tanzanians maybe paying too little. But the right question to ask is how that little is spent. There is no sign that the government is spending taxpayers' money wisely. Priorities are often misplaced and constantly changing. Honestly, I see no reason for paying tax because it is almost certain that it will be misused. And nobody around me see a reason for paying tax. Our expectations could be higher than what we pay but this is not a sufficient condition for more pay. For Tanzanians to pay (more) tax willingly and take pride in doing so, give them the value for their money (no matter how small). 2. Get rid of exemptions except for education and health services. Why grant exemption to a for-profit mining company? What is the impact of these exemptions? Do they real attract investments? 3. Do not raise the actual rates. Seal all the loopholes first i.e. fight evasions. And on this one, the government is neither willing nor interested to act. This is because key players in the government are also associated with businesses. Conflict of interest. They facilitate evasion. Someone is the head of Investment Center today and Chair of the Board for mining company soon after retirement. Mwalimu Nyerere once said incompetent government cannot collect tax.

Submitted by Eliezer on
I commented on this blog few days ago. It's yet to be posted. Should I assume that moderator found it to be unsuitable for posting?

Submitted by Anne Brockmeyer on
I think it’s a great idea to have a policy discussion based on real data! I’d like to make a few comments on the optimal design of corporate tax policy, informed by my PhD research at the London School of Economics. First, I think that reducing tax exemptions is generally a good idea. It will increase tax revenues, while spreading the tax burden more equally and reducing administrative costs, for both the firms and the tax authorities. Spreading the tax burden more equally will raise the perception that the system is fair and thus improve tax morale and compliance. Reducing exemptions may also reduce evasion. My research on UK corporations shows that small firms manipulate their deductions and costs to artificially decrease their taxable income and thus their tax liability. Some governments, such as those in Pakistan and Mexico, even limit the deductibility of costs in order to prevent firms from artificially under-reporting their tax revenue. Together a group of co-authors from LSE, we show that the government in Pakistan reduced tax evasion by imposing a turnover tax (rather than an income tax) on firms whose income tax liability falls below a certain threshold. As for tax evasion under the VAT, research by Dina Pomeranz (http://www.hbs.edu/faculty/Pages/item.aspx?num=43830) shows how audit threats can increase compliance, especially for transactions by retail companies and other firms that directly supply to the final consumer, as these transactions are not covered by the VAT paper trail. Audits (or threats thereof) also have important trickle down effects to suppliers further down the Vat chain. These multiplier effects should be taken account when choosing which firms to audit. In addition to the audit/enforcement policy, the design of the VAT system is a key determinant of compliance. Tanzania increased the VAT exemption threshold in 2004. This relieves many small firms from the burden of keeping records and filing VAT payments/claims. However, it also means that the VAT self-enforcement chain breaks down for value chains that include these small exempted firms. The tax authorities loose revenue not only from the newly exempted firms, but also from others that trade with them. Unfortunately, we do not have empirical evidence so far on the optimal VAT exemption threshold. By the way, I am not surprised that the tax revenue distribution in Tanzania is extremely skewed. Even in the UK, the largest 1% of firms account for 80% of corporate tax revenue (http://www.ifs.org.uk/publications/5885). This is due to the nature of the firm-size distribution, which is very skewed in developed economies and even more skewed in developing economies. Whether or not to attempt to increase tax revenue from the informal sector is of course an open debate… Personally, I think that taxing micro/informal sector firms should be attempted only if significant non-tax benefits are to be expected (i.e. firms are credit constraint and access to financial intermediation is conditional upon tax registration). Otherwise, the administrative costs of taxing small firms are likely to exceed the benefits in terms of increased tax revenue. As I have never lived in Tanzania, it seems inappropriate for me to comment on whether the government is raising enough revenue to fund a sufficient level of service provision. However, as was mentioned in a previous comment, the question is not only whether the revenue raised is enough to fund the desired level of service provision, but also how much of the revenue raised is actually channelled into service provision (rather than lost on the way in the pockets of corrupt bureaucrats or contractors). Closing those leaks (for instance through systematic publishing of records and accounts for all projects, and the involvement of civil society in social audits) may be easier and less distortionary to the economy than raising more tax revenue.

Submitted by Sam on
I have been in business for a number of years. There is exigency of measure to collect the taxes. I think the major problem is failure to collect revenue from all sources. We look on the quality instead of quantity, thus if we target small tax payers equally with larger taxpayers, we may achieve double revenue target. But what we have is the KINGS TREATMENT for the larger tax payers and PAUPER treatment for the small tax payer. This discourages the spirit of AGGREGATE Sum of small amounts makes a whole, which would have increased our revenue base tremendously! lets refocus and deliver more on the revenue targets. In addition, the revenue targets of the tax body must be properly scrutinized by the state because they seems to be super performing every year, which is not bad but is it realistic?

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