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If one
looks at the latest regional economic outlook for Africa
released two weeks ago by the International Monetary Fund (IMF),
it is clear that Ethiopia’s standing in its tax collection
performance is much lower than even the Sub-Sahara African
average. The share of revenue generated from various forms
of direct and indirect taxes to the Gross Domestic Products
(GDP) of Ethiopia was at 12.8pc in 2007, while Africa’s
average was 23.4pc.
Ethiopia is not, however, alone in the list of low
performers; there are countries such as Rwanda (12.4pc)
Central African Republic (10.2pc), Comoros (12.1pc), and
Sierra Leone (10.8pc) which collected lower revenue from
taxes than Ethiopia did.
This
picture will be hardly any different when the current budget
year comes to an end. In the first half of the fiscal year,
the Federal Government claimed to have collected 9.729
billion Br, slightly missing its target of 10.246 billion
Br, according to the Ministry of Revenues, a federal agency
responsible for revenue collection through its three other
agencies: the Federal Inland Revenues Authority (FIRA), the
Ethiopian Customs Authority (ECA) and the National Lottery
Administration (NLA).
From
these revenue collections, the highest portion was the
indirect taxes collected by the Ethiopian Customs Authority,
which accounted for 55.69pc, whereas the FIRA comprised
44.18pc. The remaining minuscule amount was generated by the
lottery administration.
Despite
a decision made by the Federal Government on March 18, 2008,
to lift value added (VAT) and turnover (TOT) taxes on food
grains and flour, in a bid to reduce the impact of runaway
inflation on citizens, costing the government approximately
400 million Br, the projection made by the IMF for the year
2008 is positive. Nonetheless, at 13.4pc (which still is a
far cry when compared with Ethiopia’s performance for the
average five-year period - beginning 1997 - of 15.1pc)
remains to be one of the lowest in Africa, and almost half
of what will be the average for Sub-Saharan Africa.
The
reason for this poor performance is clear.
Almost
all countries the world over are supported by resources
drawn from the economy. These states introduce and issue
different types of taxes. But each type enforced has certain
advantages and each causes unique problems in
implementation. Ethiopia is no different in this, although
the degree at which the state subsidizes the poor makes it
one of the largest welfare states.
The
Ethiopian government gives subsidies on fuel, food, cement,
regional states and municipalities to the tune of five
billion Birr annually; for all I can see, these subsidies
will continue. Government expenditure is indeed ballooning.
Unfortunately, neither the number of tax types nor the base
of existing forms of taxes is enough to support this welfare
state. Ethiopia’s governments are traditionally limited to
revenue generated from duties, VAT as well as corporate and
income taxes.
I would
suggest that the government should focus on other means and
types of revenue generation, if not work more on the few
that exist. For instance, taxes on land and property
generate the lowest amount of income as compared to what is
raised by many African countries and the rest of the world.
Levying
additional tax on land gains in cities and towns is
considered, by some economists, as the most efficient way of
generating revenue and encourages efforts to improve the
quality (that is, the economic value) of land. It supports
developing plots effectively to build skyscrapers. This is a
major source of revenue for most municipal governments in
developed and developing countries.
Property tax is likely to be similar to the “roof tax”,
(equivalent to the Amharic “taria gibir”), which is a levy
proportionate to the size and scale of a building. It is, in
effect, a tax on the number and density of houses. Levying
additional taxes on land would drive down prices.
Land
tax has obvious advantages: it is simple and cheap to levy;
evasion is impossible; it is transparent; and it penalizes
owners who do not put their land to use. This tax is usually
levied based on the size, value and location of plots.
For
instance, current land tax rates around Bole area
(considered to be the ‘Beverly Hills’ of Ethiopia) are less
than one Birr per square metre. Compared to the tax rate in
Nairobi, the capital of Kenya, it is almost nothing. In
Nairobi, land tax for city centre areas would cost 30
dollars per square metre, and does not include property tax.
As can
be seen from the experience of cities in China, where the
new policy to raise land fees and taxes has been tried,
higher land taxes and fees would check excessive
redevelopment of plots for industrial and commercial
projects and force local governments to improve the
viability of projects.
A very important benefit of tax on land over income tax is
that the revenue always equals the tax levy, unlike income
or sales taxes, which can result in shortfalls producing
budget deficits. Tax on land always produces the required
and budgeted revenue for municipality’s tax levies.
Land
and property taxes generally tend to redistribute the
benefits of wealth from higher to lower income groups, since
they often pay for state programmes of subsidizing the
construction and running of health centres, schools and
other low cost and free services used by low-income groups.
Some
economists believe that checking excessive growth of credit
and land supply could be an effective way of cooling the
economy and controlling inflation. Lack of effective
controls will lead the economy to the level of, “you can’t
steer it, you can’t regulate it anymore” situation. You
cannot put the genie back into the bottle.
All
major city municipalities, such as Dire Dawa, Mekelle, Bahir
Dar and others, never produce sufficient revenue to be
shared; most of their revenue collecting institutions are
passive. City administration problems are mainly because
their chronic income shortfalls do not allow them to
maintain planned activities.
In
order to cover this shortfall of budget and to be
self-sufficient, while maintaining their investment
programme, they should increase their capacity in revenue
collection.
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