Updated: Jan 21, 2020
The determination of taxes in Malawi, or anywhere in the world, for that matter, remains an incessantly debatable matter. The idea of setting aside a hard-earned remuneration, usually determined by a third party to one’s personal affairs, to deposit into the charge of usually unscrupulous individuals, is not an easy phenomenon for many working individuals. A self-acclaimed capitalist system as ours is supposed to be characterized by low taxes on account of encouraging high private sector activity whose low remittances to the government are made up for through quantity rather than size of the levy. Alas! This is not quite the case with our situation, whether one considers the taxation on individuals or the corporate world. Even worse is that, in spite of the relatively high tax rates, the public service we get for it fails to par with ideal standards of living.
On the other hand, lessons from the Nordics, Germany and France, for example, show how social democracies make good on the promise for total welfare as high taxes cover the gaps individual earnings fall short on. Under the socialist mantra they go by, governments also work tirelessly to bridge the socio-economic gap between the rich and poor. It is by no means strange that capitalist regimes in much of Western world feel lower (corporate) taxes are good for a well-functioning market system, a school of thought seemingly superficially borrowed by a nation as ours.
Depending on where you are and the socio-economic issues before you, it matters which regime you subscribe to. But despite the obvious polarity in the ideal politics behind a national tax system, the challenge we see Malawi is faced with rests in, for now, ensuring the system we have actually functions.
Recent events perhaps help to set this article in motion, particularly as the Malawi Revenue Authority (MRA) has lived up to its reputation of underperformance. On the one hand is the structural reforms currently being undertaken, and the honoring of past debts to the victims of the 2010 reforms where the disgruntled have taken the tax collection body to court for unfair termination of employment. On the other hand, under-collection is not a surprising phenomenon for the tax collector, but that it continues to show that whatever system we have on our hands misfires more than it collects to meet the targets necessary to excite economic growth and development through the public system.
We conform to the idea that the MRA is an extremely complex undertaking and frankly not one that is easy to manage as it navigates the various collection streams of tax collection. But there is one thing that seems to affect not its efficiency but whether it is and will be effective at its job. This concerns its database of taxpayers that is conventionally challenged with a poor stock of taxpayers. It is not strange to see how inaccurately our government falls short of knowing everyone that must be paying taxes today, a scenario of tax-evasion that some truants speak of with almost a sense of triumph.
It must be common knowledge that even those that evade honoring tax payments will operate on a platform that taxes collected from other sources will support systems that sustain the very business environment that allows for their existence. This constraining factor on the proper functioning of the public support system hurts everyone on the overall, particularly as it must maintain high taxes for the handful of taxpayers if it must maintain a certain level of support. So, the MRA must clean up its system by ensuring that its is up to date on everyone who must be paying their taxes.
In this vein, we are ready to – just for the sake of this argument – adjust our staunchly-held position on taxation of corporates, even as we think it is important to maintain high-enough business taxes. (See our article of June 26, 2017). We find it easy to predict that corporate taxes that currently stand at no less than 30% could easily fall to the 20% that many corporates are currently persuading government to materialize so more business is stimulated. For this website, bringing everyone that undertakes an economic activity into the tax system is the only condition for which taxes can be lowered.
There are more benefits that a broader tax base would guarantee for Malawians. This must be common knowledge, although not evidently common practice in our country. Not just corporates but especially the law-abiding Malawian. Higher tax revenues would allow for value-added tax (VAT) to be removed from essential items that the wider public relies on for daily survival, in turn propping up access to basic commodities for more Malawians to afford a decent standard of living. Productive citizens would be enthused to work, and children would be able to survive a full school day without tending to a grumbling stomach. And, MRA would more easily turn in returns that make sense than they do at the moment.
A holistic reform of the tax system is required. The current system of tax collection is punitive on the few, and its reach covers even those who do not benefit from some uses to which certain taxes are employed. The incidence of fringe benefits tax, then, should fall on the beneficiary of the benefits rather than taking an all-encompassing approach to tax-paying individuals and every other company, regardless of whether they directly enjoy these benefits. This differentiated system of taxation is particularly critical for the maintenance of not just a just system of tax administration but one that also boosts aggregate demand on the local markets and production. It safeguards the larger population from the protection of the interests of the rich, usually a small proportion of the economy. Those individuals and companies spared from taxes and levies that do not concern their livelihoods (whatever that is) have an option to invest the spare change in more productive uses, with the spiral effect to attract positive multiplier effects of the taxation system on the larger economy.
However, the story of a well-functioning and sane taxation system does not end there. Because graft does not spare our MRA. It is absolutely an imperative to mainstream anti-corruption measures in every reform that takes place in a Malawian public institution today. This is because graft is such a part of the problem. In instituting measures that fix the tax base, the reform process is futile if it ignores the hemorrhage of already-collected funds that a few employees of the organization directly reroute to their personal account.
But Tom Malata, the body’s Commissioner General, has a job description that must transcend this. He runs an inefficient institution, whose incompetence is frequently taken advantage of by rent-seekers who are perpetuating malfeasance. Mr. Malata must wield a hardline in heading the institution than impose modest targets that are easy to reach, much more strongly that his kind, gentle impressions seem to communicate. A stronger stand on the management of the institution will be critical to set more ambitious targets that operational and a good portion of the country’s development budgets will thrive on for years to come.
And, if the MRA could do this, it would give the rest of us some good repose on tracking the on-goings at the tax collection body, so we can focus on the things that matter, which is holding government to account on its promises.