Excessive Corporate Tax is Hurting Business Innovations in Africa

Source: icsid.org

Africa in the last decade has not witnessed ample development as proposed in the MDGs and towards the implementation of the SDGs since governments have writhed in finding means for financing series of seemingly enormous development agenda, which has seen a great rise in international debt for most African countries. While most of these countries struggle with debt servicing and settlements, pressure grows on corporate taxation on the home front.

The Africa of today is in dire need to capacitate an ever-growing population, averaging about 5% annually. Governments will definitely need to increase spendings but should not be dependent on corporate tax. It will be consequentially grave for governments to raise tax rates considering the recent abysmal performance of economies across the continent, if latest performance indices are anything but valid. Rather than rashly increasing tax rates especially the corporate taxes as it trickles down negatively on the real tax revenue, focus should be on expanding the tax base.

One of the main ruins to investment in modern economics is high tax rates; it logically forces expanding businesses to invest locally accrued revenue in foreign markets with lesser tax rates. For example, in 2011 dozens of top earning companies left Nigeria for other African states where cost of operation was lesser and tax rates favourable, it dearly cost the Nigerian economy billions of nairas in revenue within a short period, part of why it is heavily shaken by recent fluctuating oil prices.

African governments hurt business innovations by proportionately attempting to feed everybody by excessively collecting from the capacitated few. It compels the majority to persistently depend on the revenue from the working few, making everybody to try to please everybody else at the expense of their own comfort. Just a perfect depiction of The Land of Gentlemen, an adaptation from Li Ruzhen’s Flowers in the Mirror, a 19^th century Chinese novel where conventional welfarism eventually led to conflict and lack of consensus.

Evidently, when taxes become the highest budget on the ledger sheet, businesses will be compelled to raise prices of commodities to balance the book as no company wills to run on deficit. Jobs will be cut, prompting a pushof more figures into the labour market.Simply put, loses of jobs caused by high taxes leads to a drop in government revenue, as economic production drops then government raises tax rate to regain the cost revenue, production drops again and revenue drops even more.

The US was faced with a similar dilemma in its taxation system when unemployment was ravaging and incapacitating the economy in the 1980s. Prior to Ronald Reagan’s emergence as the US president in 1981, he advocated for a fundamental tax reduction policy. He argued that the most possible way to promote economic growth was to gradually reduce tax rates by at least a 30% over the period of three years especially the upper income taxes. Reagan adopted the ‘supply-side’ economic principle. The idea was that higher income taxes will be cut as to promote businesses capacities to increase investments and spendings: which means lower tax rate will translate into more revenue and more resource to grow, and effectively enlarge the economic base on the long-run by providing more jobs and of course more taxpayers.  

However, inflation did crept in at the initial as with most major reforms but after it was brought under control, the US economy witnessed rapid growth and around 21million jobs were created within the an 8year period through historic innovations averaging a 2.6 million annually while tax revenue and GDP averaged a 7% annually between 1981-1989.

Drawing a parallel between the ‘Reaganomics’ experiment and the current Africa might be enormous, but Mauritius’ tax policies prove it on the domestic. A 15% makes the lowest in Africa while it competitively ranks highest on the Global Competiveness Index for an African country placing a 46^th globally. The secret here is there must be a relative stability for ratio of tax revenue to GDP regardless of the existing tax policies.

It is obvious taxes unfortunately add cost to economic dealings; they affect and hinder aggregate upward movement of the curve. If taxes are minimised more transactions will happen at a lower price point. Albeit, there are always capacities for governments to expand their tax base and until they have fully done that, it will be economically immoral to increase tax levies on potential expansionists.

With 60% of African population between 15 and 25 accounting for 45% of its labour force, employment capacities could still be expanded. African states should not be Bastiat’s “fictitious institution where everybody try to live by embody else”. Social welfarism is the old wisdom dismantling the Africa of today. Only attitudes about trade and innovation can hold it together not excessive tax levies.

-          Ibrahim B. Anoba writes via anobasenior@rocketmail.com