Tax incentives and how they hurt the poor: countries and persons
In March 2019, the Jesuits Justice and Ecology Network Africa (JENA), Jesuitenmission in Germany and the Jesuit Hakimani Centre (JHC) in Kenya organized a conference in Nairobi on the theme, ‘Stemming Illicit Financial Flows (IFFs) and Enhancing Domestic Resource Mobilization (DRM) in Africa’. This theme was derived from the preceding years of research on the topic “Tax Justice and Poverty”, considering the increasing inequality and poverty and how to derive sustainable solution to these problems faced by individuals and nations. From the conference presentations and discussions, gave one of the issues that repeatedly surfaced for possible advocacy is the tax exemptions and tax incentives that are granted to tax payers to encourage investment.
Tax exemptions refer to expenditure, income, or investment which should ideally be taxed but on which the legitimate authority like the Government decides to have no tax is levied to serve a specific purpose (such as to encourage import of goods that are in short supply) for a specified period. While tax incentive refers to the whole range of advantages such as tax deduction, exclusion, or exemption offered as an enticement for a tax payer to engage in a specified activity (such as investment in capital goods) for a certain period.” Tax incentives (exemptions) are granted for specific forms of taxes and various reasons. Tax exemptions granted to all citizens should be considered a benefit but the fact is that what one loses is a gain for the other party. This is the perspective of the discussions at the conference about tax incentives (exemptions), which are increasingly becoming abused against the principle of “Ability to Pay” and thus failing to fulfill the role of taxes as a means of redistributing wealth. Tax incentives granted to the wealthy individuals and corporations thus provides more avenues for them to loot potential revenue from the state, and by extension, the common citizens.
As two African countries that participated in the research, Kenya is considered to be losing about $1 billion annually while Zambia lost about $4.5 billion at one stage in tax fraud and other related maneuvers in corporate taxation. Considering the poverty-causing impact of tax incentives, Wakaguyu wa Kiburi presents a simple analysis on how granting tax incentives to highly subsidized sugar-producing companies from Brazil, for example, increases the poverty levels of Kenyan sugar cane farmers. This is because, they take between 1-2 years producing one crop of sugar cane, the prices of which will be determined by the already flooded markets with cheap imported sugar. He thus argues that it is important to grant incentives for imports for dealing with emergency, such considerations should not be done to the detriment of local production.
The Catholic Social Teaching foundation of the Tax Justice and Poverty research that focuses on the ordinary human person as the sole beneficiary of all human activity, gives further ground to see tax incentives as an affront to promoting solidarity, common good and support for the poor and less privileged members of the society. As emerged from the conference, taxes should also be viewed as a “right” for the ordinary and less privileged members of the society – the poor, children, women, vulnerable, less privileged “to demand” through the legitimate authority of the state. However, in all countries, the super-rich and the multi-national corporations are very powerful and influential in lobbying for tax policies and regulations to favour them. This implies that, achieving pro-poor tax policies requires a more united effort from all the stakeholders concerned.
With the problems facing African countries in achieving genuine, pro-poor development, there was a unanimous agreement and emphasis on increasing revenue collection rather than relying on foreign development assistance, trade proceeds and remittances, among others. In this regard, the granting of incentives is considered contrary to this effort. Zambia was given as a country that had been rather over-generous with its tax incentives, before making a U-turn to review some of these incentives.
Addressing the problem of growing poverty and increasing inequality, requires among things, fair taxation. This requires again that the super-rich and MNCs pay their fair share of taxes, other than seeking tax incentives. It was affirmed that the rich, who seek these incentives, can operate business comfortably with tax regimes that have less incentives. Furthermore, addressing poverty should be considered as a “right” rather than euphemistically as a “goal” to be achieved. This outlook has the effect of dampening the sense of urgency that is required to achieve poverty eradication.
Proposals for solutions emphasized transparency.
- It proposed that there should be more transparency in matters of taxation, including negotiating with the multinational corporations about tax incentives. This should be done with a proper “cost-benefit” analysis where countries engaging in such negotiations should consider their national gains before “giving-it-away” in form of tax incentives.
- Transparency should also be extended to legal aspects that involve country-by-country reporting on the dealings of MNCs, beneficial ownership and tax havens and secrecy jurisdictions in financial matters. Such would open the eyes of countries that have tended to be generous with tax incentives, yet the MNCs tend to take advantage of these and shift their profits elsewhere with less of it ploughed back.
- Another level of transparency with open budgets is expected to reduce lack of funds as governments work according to plan. The governments would also be more accountable to their citizens.
Article by Pascal Andebo