Tax Incentives :(

I have always had problems with tax incentives.... simply because I believe if someone is investing, he is not doing you (as a country) a favour. He is in it for the money, he knows he can make enough profit without incentives before he starts, and the tax incentives simply make him "super-normal" profits! Prove me wrong! No one single person would invest if the profit margin is non-existing or if the profit is only coming in after the tax incentive!!!

My looking at tax incentive maybe wrong to some of you. But in the same vein, thats why I have little understanding of the role of Zambia Development Agency (ZDA). I seriously need someone to educate me! If you are doing a course and the school says do all your assignments, tests, etc, but to encourage, we wont mark them as we will give you those marks (about 50%) and you just need to get more than 50% from both the assignments and the final exam to pass the course - who would let such a chance go begging???? That my people is how I see the tax incentive.

I have always said, to an economist, only two things are certain: death and paying of tax! We will all die, and we all should pay tax! So the logic of tax incentive violates my belief - and I can prove it!

Tax Needs

Taxes are paid for infrastructure, security and other public goods which governments put up. So if a real investor asks for tax incentive, ask him if he can do the roads, pay the police, hospital staff and their buildings while he is running his investment. If he refuses, he shouldn't get the tax incentive! No one investor would be willing to not pay taxes if he wont be assured of security through the police, courts of law, access roads, etc. So if he asks for tax incentive, he simply wants someone else to pay for those services! Just on this point, whats the role of ZDA? To unfairly ask people to pay for services used by these wealthy companies?

Incentive Benefits

I have been looking at a report that will show me the benefits of tax incentives in Zambia (as opposed to the benefits the country would have had if taxes were  paid)! I believe that is the single most important reason for continuing with incentives in this country. Without it, we shouldn't even think about it. What benefit would tax incentives bring if they provide no benefits? We would be doing a dis-service to ourselves, our children, and our children's children!

Getting High on Incentives

I think we have reached a point that we get high on incentives, we may even start asking companies to invest through an incentive of not requiring them to register as a company. Seriously when we reach a stage of allowing companies to steal, as an incentive, we can't sink lower than that. This is through what someone called the VAT "incentive". My little education would not understand this, but I believe people think this is possible.

Let me explain my failure to understand the VAT incentive.

VAT is a consumption tax paid by you and me on final goods that we buy for consumption. For example cooking oil, soft drinks, etc. So the company selling you these things will "hold the tax" and submit to the revenue authority. You pay, they take it to government. If you give that company a tax holiday for that kind of tax, you are asking people to pay to the company (for their operations) and not for public services! Is this normal? I think there is no difference in that action with some someone thieves high-jacking an armored vehicle taking taxes to the Bank of Zambia! Money is illegally being pumped into the company by people who don't want to invest in that company and for no benefits. Its like you simply change the one who is supposed to tax from the tax authority (in this case ZRA) to the company. I think the issue would actually make sense to someone people if you explain it better like this:

The action is like asking government to give back the taxes paid by the people to the company to do with it as it wishes. So the government goes and cuts a cheque equivalent to what that company brought in as taxes. 

There is no basis, no logic! The tax burden is born by people, the company has nothing to do with VAT. They don't pay it, they simply collect it for government. So if you give them what you call an "incentive", you simply giving them money or investing in their company as a government! I would add and say, thats theft! 

I think the only logical tax incentive is to allow every single entity to pay the correct amount of tax due, so that in time, they can pay less as the requirements are met. Without this, they actually open up an imbalance in taxes required, and would lead to more taxes paid in future. I always say, paying less taxes, is actually asking to pay more taxes!

If our taxes don't meet today and tomorrow's requirements, we will need to pay more taxes in future! Don't believe me? What taxes do you think people in Greece are paying compared to what they paid some years ago? Any failure to raise money by a government will lead to people paying more to meet those demands. I know a government can borrow, but ultimately, those loans will be repaid from taxes in the end! There is no one single source of revenue for government that can replace taxes. Actually with tax incentives, you may end up paying taxes to make up for the taxes that a company needed to pay. More so if that is a foreign company which would just pack its bags and leave!

We have to one day call for the end of a thinking that one needs to incentivize investment! Investment comes with or without incentives. As long as someone knows that they will make a great incentive, the business environment itself is enough incentive. Zambia has incentives in that area, investments are safe, we just need to get the taxes and build great infrastructure as the last incentive - not giving companies money! 

Augmented Tax Incentive Economics

I'm always amazed at how people in this country take taxes as an unnecessary evil which should be avoided at all times. Any chance that is presented to someone to avoid being taxed, they jump for it. So maybe the issue of taxes has not been presented to everyone in their complete sense. I know I may have touched about it from time to time, but I don't think I have aimed at hitting the 'nail on the head' as they always say! So here is my blog-ness attempt.

What is tax?

A compulsory contribution to state revenue, levied by the government on workers' income and business profits. (That's as simple a definition as I can find).

What is tax revenue used for?

Do we need to look at that? Ok maybe we should as missing one element of this can spell disaster. The most comprehensive use for tax that fits this discussion is on wikipedia:

Money provided by taxation has been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.), public works, social engineering, and the operation of government itself. Governments also use taxes to fund welfare and public services. A portion of taxes also go to pay off the state's debt and the interest this debt accumulates.

So why pay tax again?

As outlined above, all services you require from government are provided for through taxes and borrowing (loans, grants, etc) both from internal sources and external sources. So failure to pay tax implies a vote to have little government provided goods and services. This actually is the real "If you wont pay, it will never show!". Your taxes determine what you will receive from government. In Zambia we have to be quick and say all things equal as we are used to seeing our money being used to enrich some leaders! Someone told me its the only way we know how taxes are used in Zambia is wrong ways.

So I believe its about time we started believing in the usefulness of the taxes we pay. But most importantly, leaders need to show us where the taxes we pay go to. That is the remedy. It does not go well when billions are being buried, with no sign of what was put up from the taxes paid!

So can we embark on this trip of Augmented Tax Incentive Economics!

Rebirth of Economic Reason ...

I have been been delighted with the sudden introduction of reasoning in our approach to economic matters of the country. For once we look at issues in the media and hear people talk using the best possible aspect of reason and economic understanding as possible. Talk is now based on issues and not tissues!

Look at how the issues of Zamtel, Debasing or the Kwacha, Corruption fight. We have as a country looked at these issues professionally and people who didn't know about them, have been educated. That's how we should handle matters that we face each day.

I hate the political talk that was all over Facebook with no logic on the matters at hand but behaving like total cadres. I think we could have done better with economic issues. We could have addressed the issues of weak tax revenues. Lack of employment and what can be done by those in authority to bring down the unemployment rate. Inflation rate (or has that now been pushed to the day we change to the debased currency?).

Infrastructure Development

What do we need to work on? I hate going to the airport which looks like its not the biggest airport in the country. Shouldn't we be thinking about building or upgrading our airports? Why not 3 terminals - at the least!

We badly need roads and this will boast our production and exports. Which roads should be first and why? We all know its expensive to maintain roads, so why not introduce toll-gates on roads to be constructed. Would actually encourage private sector to be involved in infrastructure development, especially when we eliminate the "public-ness" of some infrastructure like roads through introduction of toll chargers which will handle the issue of excludability even if there is still a non-rivalry element - all things equal of course :)!

Budgeting??

How come we have supplementary budgets all the time? Is it a failure to plan the budget? Are things being included with no budget line all the time? What has the constitution said about all this? Where are the laws and rules related to budgeting? I have not heard a soul talk about that. And I believe even the parliament over-sight on monies of the country should be strengthened further! Have we forgotten how money was used to construct and maintain roads which parliament was not told about? Is it such a short time that these issues have disappeared? We need a check on political hand in cash of the country, let them be involved in political direction. I really need to hear this as it will help our Kwacha economics in its movement and being!

Kwacha Backed

I know this issue is a thorn to some people but we need to address the kwacha. Not the political aspects as I never wish to divert to politics on this blog! But the economics of the kwacha. I believe this is the only thing that is important - to me anyway! If we work on making our Kwacha economics better, we will focus our attention on demand stimulating of kwacha backed goods (my attempt at making Zambian production a kwacha issue). The country will aim at being better in production, consumption of kwacha backed goods, getting a fair share of the mineral worth, etc. This is a way of addressing the weaknesses in our approach to economic issues and will make sure we put in place policies, infrastructure, rules and ideas to work for and produce kwacha backed goods! Proudly Zambia - that's Kwacha backing!

We need this rebirth of reason to be channelled to and focus on kwacha backed ideas, goods, services, policies, etc

Debasing the Kwacha ...

Kwacha Economics has really taken an interesting twist this week. We are now thinking about debasing and the merits or demerits associated with it.

So let me add my voice to the debate. Clearly to correct what I have read and is out of line.

I feel good when i read about people talk about economic issues which make my daily life these days (can't believe I felt the same joy about Computers and IT a couple of years back!).

Rebasing on the Zambian kwacha should be viewed from an Economist point of view! I have been shocked by mis-leading statements about this and people will in the end be lost totally. We need to understand the fundamentals that control this in straight line and not assume the economics that is being dreamt about.

Rebasing the currency is redenomination which is different from devaluation. Wikipedia would simplify it better:

"Revaluation means a rise of a price of goods or products. This term is specially used as revaluation of a currency, where it means a rise of currency to the relation with a foreign currency in a fixed exchange rate. In floating exchange rate correct term would be appreciation. The antonym of revaluation is devaluation. Altering the face value of a currency without changing its foreign exchange rate is a redenomination, not a revaluation."

(I have read sites which have confused the two! Here)

On our case, only the face has been changed by deleting the extra three (3) zeros such that K5,000.00 will become K5.00 - simple! If you look at our currency now, K5000 is written as 5ooo (small zeros). Could be design or not, but assume the zeros are eliminated. So the new currency which will be printed will trade at the different rates. Such that, your K50,000.00 will be equal to K50.00. Hard to understand? Think of it this way, K5,000.00 is equal to $1.00, right? Assume now Kwacha2 is such that K5.00 is equal to $1.00. It simply means Kwacha2 K5.00 will be equal to K5,000.00 of the old kwacha (which we are using now). Put even simpler, its like changing kwacha to MaKwacha which is 1000 times more than the old kwacha.

There is no change in value. Just change in the face of the currency. if you go get a bag of mealie meal for K25,000.00 and you have K50,000.00, the store man will either give you K25,000.00 of the old currency or K25.00 of the new currency!

Bacause of the value being the same, it has no effect on imports or exports (all things equal as we love to say!). This is a redenomination and not a devaluation. It should be easier for people who transact across borders. You can either go buy a car in dollars or rands in durban! The vehicle worth K25 million will be the same if you buy it in Rands or Dollars. Your money simply changes faces (I know the differences in exchange rates will lead to some profit or loss, that's the exchange rate issue). All in all if you carry a stable currency like Euro and Pound, that element of loss or gain in exchanging them will be no more!

So why do countries redenomination? Simple, take our case in point. We have over the years been around the exchange rate of K5,000.00 to $1.00 if may fluctuate to K5,200.00 or K4,700.00 once in a while but we are stable in that region! So a redenomination will simplify our currency (like someone said, reduce the wheelbarrow to carry the money to pay for a car!). Will now only need K5.00 for $1.00! And can even bring back coins which are irreplaceable in some transactions like parking or toll-gates! Ever wonder why we have to buy tokens to play pool? In other countries you use your money in coins! So coinage will be part of the transaction!

There is also the issue of the buried K2.1 billions! People with buried money will either dig it up (so they exchange it for the new "currency" or lose the loot as it will only be worth to light the fire with! So it will rejuvenate transactions as there will be money which has been buried being dug up. And I hope some more people will be arrested for hiding the loot!

That is a simple explanation of what we will expect with this redenomination!!!

Using Taxes for Business ...

I was shocked to listen to this "enlightened citizen" on what Government should do about taxes to businesses in order to improve the business climate. Unfortunately he touched an area I have great interest in - Taxes!

I don't know why people in Zambia think business can only do well when they don't pay taxes! Please! Businesses have to take taxes into account whenever they take all other costs into account! What sense will that bring? A company will be better off not paying taxes and not have infrastructure or buildings to operate from? Or be exposed to all manner of crime? Or operate without knowing what tomorrow will be like as there may be a possibility of war or demonstrations?

Taxes have a serious place in a country and will mean the success or failure of a company. They enable a government to operate, carry out policies, employ law enforcement and construct roads and airports which the same company paying taxes will use to either sell his produce or transport it to its clients. Bottom line, it makes a country function. Failure to pay taxes results in a country borrowing money which will mean its citizens have to pay more taxes, or run-down infrastructure! If companies don't pay taxes, the government will still need to function and so citizen will be taxed more in PAYE, VAT or other taxes to raise the much needed cash.

So, anyone talking about taxes should really understand the situation on the ground before they open their mouth. Zambia is surrounded by poverty! It relies on donors to meet some expenses! So the taxes are not raising enough revenue for its operations. Remember the gold rule of economics - Never borrow for consumption! You can only borrow for investment as you are assured of raising the borrowed amounts. So as long as the government is borrowing to meet consumption purposes, we are doomed! And since our taxes have not yielded enough money to run the basic functions of government, we should never even think of avoiding taxes! Taxes to an economics exist as real as death to any human being. Death is certain, and so taxes are also certain.

I think we all need to take a different approach to taxation and move with them in a way that we respect paying taxes! It is shocking to find even church leaders want to buy vehicles without paying taxes!? Money donated by the people. That money donated has actually a law which will allow people donating to claim taxes out of it! I'm sorry, but that is real greedy and we must root this out and as Zambians understand that taxes are what makes Zambia!

We will gain more by being patriotic by paying taxes than buying flags at the time of a football match. Imagine if each Zambian spent K20,000.00 for the betterment of the country or to help the country with infrastructure development? That's how University of Zambia was built. And now people's children are getting an education unmatched! This is an example of a tax working. So we should now make it a point and make sure foreign investors understand that much as we appreciate the business they bring here, they should pay for peace, infrastructure, stability, resources, human capital and so on. They can do that by paying taxes. These in turn will make them have a business to run and move along. Remember, they are just here to make money - nothing else! If it was not for money, they would have not been here.

Zambians lackadaisical???

I have always been a person advocating for serious approach to work and all associated with it. I think a lot more can be done when we take it with hard work and the seriousness it deserves.

I proudly say, the lazy people are always willing to let things be the way they are and are not keen on seeing change or fighting for it. Partly I assumed was the casual approach that most of us Zambians have to certain things. However, in all the countries that Zambians have gone to or emigrated to, the situation is different. They work harder, are united like a serious community, are found in all high earning positions etc. So the coming of the Chinese seem to show us as being lazy?? Well, I think the cultural differences may show up in areas of serious concern.

The China-Zambia relation has been one of mistrust and serious concern economically. They are known to pay less to Zambian workers, have little or no respect for the country's laws and feel like the bosses of this small population. Chinese goods are considered fake and weak or unreliable. Words like "gonga" are always associated with Chinese goods. In particular the Chinese dual-sim phones with TV! And they come in many shapes some claiming to be Iphone, others Nokia and those that have no name to steal, are simply called MP4 phones. Now whoever got a chance to buy one, will confess of the ills of these phones.

Now I wondered why we always say we have a lot of Chinese people among us and yet, we never see them in night clubs, malls, or mingling among us. So to read on The Economist that these people consider us lazy ... or by the exact terminology lackadaisical made me wonder. So my first action was to coin the exact meaning of this word. To understand the perspective as I saw it, I will quote the meaning I came across it.

lack·a·dai·si·cal

adjective /ˌlakəˈdāzikəl/  Lacking enthusiasm and determination; carelessly lazy - a lackadaisical defense left the Spurs adrift in the second half

So is it "carelessly lazy" or "lacking enthusiasm and determination" that Zambians have? Seriously I think we need a serious check with such words being labelled on us.

On one hand, these are the companies that give slave wages and expect people to work and be productive? I have heard of people say 'work as you are paid' and 'you are valued as a worker, as much as you are paid'. Lackadaisical!? Maybe our change in country management, especially that people say the new leader has no room for laziness will make us move from being considered lackadaisical! Hard work is what I feel has been a problem in many aspects of the Zambian life but I don't think we ever reached a level of carelessly lazy! We have done a lot more with the little that we are given. I know corruption is a big issue in the country. And a serious approach to that will make things a lot better.

Lackadaisical is a word that we Zambians should not be placed next to. We have to do our ultimate best in all that we have. We can start by cleaning out the mess that corruption has brought, make every single investor abide by the laws of the land and bring value to their investment and not seem to be begging for investment. I firmly believe anyone coming to invest will have looked at the business gain before they get on the plane to Lusaka! So why should they come and ask for incentives? Or make requests which have no business logic! This is the disaster we have to work on!!

We need to start from scratch and make an investment worth while. No need to have investors for the sake of being investors when the overall value addition is zero!

Translating PF Manifesto into Economic Policy

I took my time to read the PF Manifesto and see how it can be translated into Economic policy.

One think is for sure, it has good things embedded in it, but the whole 'workability' of it, needs understanding the variables concerned. A simple example: There is increased Government expenditure accompanying a reduction in taxation. To all of us, this may look an impossibility and totally not possible. You can not increase your spending while keeping your revenues constant or even reducing revenue. Impossible? Well, not when you read through and realize the logic behind the increase compared to the current levels.

Tax compliance has been Government's worst enemy. How many of us have been offered a deal in the shops in town "Do you want a receipt? or no receipt for this purchase?". You say no receipt and you pay less the tax! But that's like shooting yourself in the foot. The less you pay tax, the less money government will have and the less services and structures you will see around town. We as Zambians need to develop a culture of saying no receipt and walk out of the shop and call ZRA to come and arrest that shop owner. You will pay less yes, but you might just be paying with your life as the same tax would have been used to buy medicines and repair hospitals you will need. How can we expect government to finance its operations when we spend all our time dodging paying taxes?

So if compliance levels in tax payments are increased, more revenues will reach the treasury and more can be done. With the levels of compliance right now, we need to find ways that people will start paying taxes and receive more. But I should mention that, past trends of paying taxes and government officials wasting tax payer's money has led to this behavior. We need to find ways that we can make people understand that taxes are what makes the economy and government move.

We can only expect a reduction in Pay As You Earn (PAYE), if Value Added Tax (VAT) performs well and government can finance its operations. The failure of the other taxes, the more you pay through PAYE. So imagine you getting your "no receipt" deal in Kamwala shopping area, but having to pay more in PAYE. Who has been fooled? The government will have to find a way to finance its operations or reduce the services it provides for you.

Simple consumption taxes like VAT seem useless to be paid, but they mean a lot in terms of your PAYE going up or down. So the less taxes you pay, will actually mean the more taxes you will pay! Funny but that's how the system will work!

So with this perspective of increasing compliance on the pay of us tax payers, and just the fact that the Manifesto has only seen a problem in terms of numbers on revenue and expenditure, can the Manifesto be translated into Economic policy and Economic vehicle for Zambia?

We also need to look at the impact of reducing cabinet as a means of reducing expenditure on the part of government. If the expenditure has been reduced through merging of Ministries, we just need the numbers to how much has been saved from such a move. For sure there is logic in merging Education with Science and Technology, but will this, apart from one or two posts of permamnent secretary and Minister and his deputy, result in major reduction in expenditure? If it will, then we have half solved the problem (bearing in mind of the numbers!). There is less expenditure which is wasted and can now be pushed into 15 bags of fertilizer and not 5! Such perspective surely will need serious compliance levels for tax payers. There has to be a way that we can make people pay what they should - the way the Chinese companies increased workers' salaries by simply following the law of the land.

Can such reaction be expected from traders? Or do we need to send ZRA the way it operated the time VAT was introduced? If so, we need to start now as mind you, 90 days have dropped to a lesser figure already!