The government should consider implementing corporate tax breaks and abandon SEZ

By Brian Sedze

The post 2018 elections government of Zimbabwe should consider  abandoning the levying of  corporate tax for a couple of years to spur investment,increase productivity,ease doing of business,enable competitiveness and most importantly leapfrog other regional players in export capacity.To achieve these strategic objectives the government should consider abandoning the Special Economic Zones(SEZ) and make the entire country a SEZ.

Brian Sedze
Brian Sedze

In having corporate tax, politicians either don’t understand or won’t admit that every tax ― no matter on whom it is levied ― is ultimately paid by people. Every tax on “business” gets passed on in the form of higher prices, lower wages, or lower investment return. Businesses don’t pay taxes to the government; they collect taxes for the government. One way or another, people pay.

Benjamin Franklin, popularized the expression that “nothing can be said to be certain, except death and taxes.” To that list you can add a third certainty: politicians will consistently misunderstand or misrepresent how taxes actually work. Look no further than the germinating Special Economic Zones to see the folly of elementary arithmetic not backed by any economic analysis used by politicians.

Zimbabwe in its entirety requires special fiscal dispension like the 1980s “growth point” policies.As a “growth point” the special fiscal incentives given to SEZ should just apply to the entire country.We are at the bottom of the world economic pile and we need radical fiscal reform.

To catch up with the region and the world, the country need investment and savings.The country owners now and then should think beyond the ordinary to attract investment in a country bedeviled by political uncertainity and a toxic investment climate.Corporate Tax break would be an initiative that will help the country to leapfrog the region in attracting investment.

It’s a charade  in Zimbabwe,and everywhere else ,that companies pay taxes.In as much as it can be denied, it is actually true that Income Tax(corporate tax) is often a great work of fiction especially in the globalized world of international tax competition.

Unfortunately our government look at taxes the way a barfly looks at an ATM near closing time: he thinks he can simply draw money out of the economy whenever he wants without consequence. As any Economics 101 textbook would have explained, had politicians  picked one, corporate tax is destined to lead to prices. Instead of looking in the mirror, though, they blame business for inordinate prices business levy , on whom they foisted the tax in the first place. The implication? The government believes that “business,” not customers, should pay the tax.

Examples

The government  need to look at fuel for proof of the folly of thinking that they can tax companies. Fiscal authorities  increased fuel taxes, which currently add 62 cents to the price of each litre of petrol sold in Zimbabwe. Proponents of the fuel tax hikes argued that the taxes would be levied on oil companies and wholesalers, not consumers. It apparently never occurred to the fiscal authorities that the oil companies and wholesalers would pass the tax along to the people.

The average Zimbabwean now pays 1.32  for a litre of petrol.But that’s sales, not profit. Oil company profit margins are around 6 to 7 percent, meaning that oil companies actually pocket around 10 cents per litre of fuel, which is about what they made before the tax increases. The taxpayer, as usual, picks up the difference.

The latest cash cow are telecommunication operators who pass over 27 per cent of revenue to the government .Again these taxes are  presented as a “tax on businesses.” Politicians did some third-grade math and decided that they should get  the optimum on the growing ICT sector by finding any flimsy reason to collect the greatest possible tax . Instead, they are destroying a burgeoning local industry.The consumer now  has to do with less data and voice per dollar and that is how the people are paying.The people always pay.

In  our  2017 study, it will take 137 days for any individual tax payer to pay the country’s tax burden.This means all labour and intellect for 137 days represent tax . But that’s not all. If you include government borrowing, which represents future taxes the government must collect to pay the bills it will increase further.This anormaly can only be corrected by increasing the national income pie which require new investment,increased productivity and spurring of exports.Our country tattered image requires something out of the ordinary to attract such investments to increase the national pie.

Taxes in Reality

In pushing for more taxes, politicians either don’t understand or won’t admit that every tax ― no matter on whom it is levied ― is ultimately paid by people. Every tax on “business” gets passed on in the form of higher prices, lower wages, or lower investment return. Businesses don’t pay taxes to the government; they collect taxes for the government. One way or another, people pay.

They take every opportunity to tax “business,” and when businesses simply pass the taxes along to consumers, workers, and investors as they must, those same politicians cry foul.

But here’s the rub. There are only two possible explanations for any of this: politicians who claim that businesses will pay for more taxes are either too stupid to understand simple economics or they are lying. And it really doesn’t matter which of those things is true. Either way, the citizens of Zimbabwe  deserve better in getting to be fully employed and to invest in business for optimum return.

Should business get away without any fiscal sanctions

The current tax regime undermines international tax competitiveness as a one of the country’s prosperity strategy. It’s sad because politicians should not try to reinvent the wheel when we already know the right way to do tax reform ,which is to increase the national pie.

The increase in the national pie will enable a flat tax rate which is the gold standard of enabling fair tax rate that doesn’t punish hard work or many other  achievements.

The country’s strategic imperative should be to attract investment ,grow the national pie,increase country productivity and spur exports.The corporate tax breaks should be coupled with policy directives on re-investment,employment,export targets,purchase of capital equipment and a restive dividend policy.

Special Economic Zones favour foreign business entities and seem to disadvantage local entities.They seem to  promote foreign entities to come and prosper in Zimbabwe. The SEZ have potential to drive an underground parallel economy  and could cause  serious arbitrage issues.Zimbabwe should be made a Special Economic Zone instead of just Sunway,VictoriaFalls and Bulawayo.

With corporate tax breaks the government should reduce its expenditure and move to be a small government.The government should not believe that they shall  be funding until the last person who has ability to create value has been taxed.This our country is “broke”and the government should bite the hard stuff to get of the mess.The hard stuff should include sacrificing the short term for the long term.

Writer

Brian Sedze is the interim president of the Free Enterprise Intitiative which specializes in advocacy on in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He is also the Chairman of Africa Innovation Hub and an International Tax Consultant. He can be contacted on [email protected]