BRIEF RESPONSE TO THE VEEP, DR. BAWUMIA’S PORT ‘’TAX’’ REFORM

BRIEF RESPONSE TO THE VEEP, DR. BAWUMIA’S PORT ‘’TAX’’ REFORM

13 April 2019
I am neither an economist nor a tax accountant, and my economic management is defined by two factors:
1. Charity begins at home – we were taught at home to live within our means.

2. Aggreyism– to learn, and if possible, improve upon the best practice of our domiciled country. (I currently live in a civilised country where good economic principles underpin economic policy.)

Paradoxically, these are the two factors lacking in Ghana and most of Africa’s politico-economic management culture.

In Ghana, we live beyond our means. Governments spending beyond their means is just the political arm of a cultural problem. Relatives and friends bankroll our profligacy, governments use import duties and taxes to feed their gluttony, while Governments have milked this cow mercilessly over the years.

It is obvious that there isn’t enough money to create new regions, districts and start free boarding SHS, yet we do them because our leaders think there’s a cow that produces unlimited milk. Now that approach isn’t only unsustainable, it threatens to bring about political pain to the wicked dairy farmer.

Things are falling apart, and the centre is no longer holding. The result is the bubble thought policy of PORT REFORMS announced by Bawumia on 03/04/2019.

PORT REFORMS TO ENHANCE COMPETITIVENESS

‘’To reduce the incidence of smuggling, the benchmark values for imports have been reduced by 50% except for vehicles it will be reduced by 30%.’’ Vice-President Dr. Bawumia 03/04/2019.

Benchmark values (BV) constitute internationally set prices for goods that are used to determine Import duty (ID).
ID = BV x tax rate. For vehicles, the tax rate is between 10%-20% depending on the engine capacity. A 2L car attracts 10% tax rate and 4L attracts 20%.

Let’s start with the duties and taxes from international trade or the Ports as in the Nov 2018 budget (in cedis and in millions).

Taxes at Ports 14 366.47 + xxxxxxx

• Import duty 7 417.79
• VAT 5 029.56
• NHIL 959.56
• Getfund 959.56
• Exim + Ecowas xxxxxxx (couldn’t see figures in budget)

Revenue from the ports of Ghc 14 366.47 + xxxxxx constitutes about 51% of Import duty and 49% of other taxes. Reducing taxes at the ports implies reducing ID or the other taxes (OT) or both (IDOT).

The government has reduced ID by reducing BV by 30-50%. It sounds good, but is it appropriate? NO.
I will discuss this under 3 broad areas of taxation; principles, objectives, and benefits.

PRINCIPLES: Simple; Neutral; Fair; and Flexible.

OBJECTIVES: Compliance and certainty.

BENEFITS: money for government; stimulate economy; inspire aspiration; and re-distribute wealth.

Simple – scrapping VAT, NHIL & Getfund simplifies the tax system, potentially increases compliance because total tax paid is reduced by 48%, and certainty is bolstered because these taxes are no longer available for government to increase arbitrarily.

Neutral: BV is indicative of the intrinsic value of a good, so arbitrarily reducing it is anti-market and unnecessary attack on the neutrality principle. Government could have reduced the tax rate instead if it really wanted to reduce ID.

The best approach is to reduce the OT which are market neutral.
Fair: People’s rational behaviour in any economy will always lead them to find ways to evade high tax. That’s the reality.

So while reducing tax is a good thing since it increases compliance, BV is not a tax. Dr. Bawumia the highly touted economist should know that.

Flexible: This allows for the application of taxes to achieve a specific socio-economic outcome. A blanket reduction of BV trumps flexibility. The best practice is to classify imported goods into production-linked (PL) and consumption-linked (CL), where PL goods are exempted from OT while flexible OT is applied to CL goods.

Australians pay $0.57/litre as fuel tax. This yields about $19b/year, about $7b goes back to farmers and others whose use is deemed production-linked. Government doesn’t reduce the BV of fuel – that will be interfering with the market. Rather it exempts farmers and PL users from fuel tax.

• Government indirectly subsidizes farmers
• Government indirectly eases cost of living since farmers would’ve passed the $7b on to users.
• The $7B is used to reinvest, employ more people and export more food, thus stimulating the economy. Ultimately, Government ends up getting more than the $7b from individual tax, company tax and increased exports.

A good economic principle I’ve learned from Australia is that you don’t reduce BV or the intrinsic value of a commodity. Rather it is best to reduce or scrap taxes on a good to increase compliance, certainty, stimulate growth, generate more personal and corporate wealth and thereby more tax revenue to the state.

For Dr. Bawumia to announce a tax policy aimed at smuggling (compliance) only is very disappointing, and for the NDC not to be able to confront him on that shows we lack depth. We are in trouble.

This is my Easter appearance. Stay tuned.