African countries should consider using wealth and property taxes to address societal issues as they begin to recover from the COVID-19 pandemic, according to political economists and tax researchers.
In a June 15 webinar organized by the United Nations University World Institute for Development Economics Research (UNU-WIDER), political economist Mick Moore said African tax administrations should shift their focus from small taxpayers in the informal economy to high-income individuals and property.
Moore, a professorial fellow at the Institute of Development Studies at the University of Sussex, said research from 2014 shows that a majority of high-income people in Rwanda and Uganda did not submit personal income tax returns, and their associated companies also underpaid corporate income tax. Other undertaxed areas include mining, tobacco and alcohol, and investors, who are granted “excessive” exemptions, he said, adding that there are also too many VAT exemptions.
Uganda had a big push to register more small taxpayers in the informal economy, and it didn’t make much of a difference, Moore said. Many did not have enough income to justify paying taxes. “I don’t think small operators should be paying tax anyway, and certainly not to national governments,” he said. Many COVID-19 relief measures missed workers in the informal economy, and those workers have borne the brunt of economic recession.
The widespread undertaxation of wealthy individuals and high-earning sectors presents an opportunity for African tax administrations looking to bulk up their resources as revenues fall and economic activity slows during the pandemic, Moore said. The unprecedented economic and social situations created by the pandemic could also allow stalled policies and proposals on wealth and property taxation to gain traction, he said.
Milly Nalukwago, assistant commissioner of research at the Uganda Revenue Authority (URA), said efforts to tax more high-income individuals and property owners are underway in Uganda. The URA created a unit to identify high-income individuals and get them to submit personal income tax returns and is mobilizing revenues in the property and rental income tax area, she said.
Many high-net-worth individuals who own properties are hiding income by reinvesting revenues and using intracompany loans, Nalukwago said. Moore said there is also untapped revenue in the form of rental income of people who own high-value properties in cities and rent them out. According to Nalukwago, about 80 percent of revenue comes from 20 percent of taxpayers, and almost half of Uganda’s taxpayers are small-to-medium taxpayers. Once low-income taxpayers see that high-income earners are paying more, the URA expects to see a change of behavior rendering all taxpayers more compliant, she said.
The URA is also analyzing revenue opportunities in digital commerce and putting together strategies for collection, Nalukwago said. “Everything is going digital, and we believe that is where we should follow the money now,” she said. Kenya and Nigeria announced plans in May to move ahead on taxing digital services.
Although IT platform usage is low in many nonnational African tax administrations, Nalukwago said more training for employees is needed. Moore said the problem is relatively fixable, and could allow for more taxpayer compliance and ease of return filing.
Most countries could increase or introduce excise taxes on luxury goods to target high-net-worth taxpayers, Moore said. A recent UNU-WIDER study on Ugandan excise taxes found that they fall more on the rich than the poor, with some variation. Excise taxes on locally brewed gin largely fell on poor people, while excise taxes on fuel fell on rich people, he said. Once governments know how excise taxes affect different groups, they can design an excise tax regime that would generate the most revenue, he said.
The biggest single untapped source of revenue, according to Moore, is “unjustified” tax exemptions for investors, which represent around 10 to 15 percent in lost tax revenue. Economists and tax professionals agree that these exemptions don’t serve any real economic purpose, nor are they tied to specific investments, Moore said, but getting rid of those exemptions is politically unpopular in many countries, a point with which Nalukwago agreed.
“In my view, [tax] exemptions [are] a tool that governments use to either attract and make attractive the environment [to] professionals, so when we try to put reason into it, it doesn’t align with the political direction,” Nalukwago said. She said she prefers to focus on rental income and property tax proposals, which are beginning to gain political traction in Uganda as a tool for COVID-19 recovery.