Sometimes one can be an excellent macroeconomist and a very bad public finance expert at the same time. I think this is the case with new Finance minister Mthuli Ncube.
One such bad idea is the recently imposed electronic transaction tax, which was increased from five cents per transaction to 2% per dollar, with minor adjustments. This proposal was the brainchild of Eddie Cross, who presented this idea in Parliament in February 2018, and subsequently defended it in an opinion https://www.newsday.co.zw/2018/10/we-told-you-so/.
By Tendai Kamba
Cross argued that this tax is easy to collect and a transaction cost that can be paid by everyone who uses an electronic payment. He argued that in 2017, the electronic transfer system handled more than $110 billion — five times our gross domestic product (GDP), so a cent in each dollar means over $1,1 billion a year to the fiscus that would help reduce the deficit of $3,2 billion.
While this proposal may sound enticing, there is no public finance expert who would advocate for such an approach. No country (besides a few African countries) has ever adopted this approach. Let me explain below why I think this is the worst policy ever.
First, this policy was implemented without wider consultation with all the stakeholders that would have brought the best minds together and crafted a way forward on how best to broaden the tax base. The policymakers did not conduct a feasibility study on the impact of the transaction tax.
In a simple undergraduate public finance programme, it’s taught that a transaction tax is a disincentive on productive economic activities; is very inefficient in that it increases the cost of doing business and that there is greater chance of tax evasion by shifting transactions into the parallel market, thus fuelling the growth of the informal banking systems.
The electronic payment system is the grease that ensures the smooth running of an economy and imposing a transaction tax is like throwing sand into the engine. This leads to a bad policy-induced economic crisis.
Zimbabwe is one of the few countries in the world that imposed a fee on people for depositing money in the banks. An electronic transfer is just an exchange mechanism underlying an economic transaction; a wise public finance economist would not impose tax on a facilitating mechanism, but would impose a tax on the actual economic activity.
Second, except for a few African countries such as Uganda, Zambia, Benin and Kenya, which have imposed internet-based or electronic transaction tax, no other economies in the world have taken such steps. That should tell Zimbabwean authorities a lot about this policy. The closest to it is a financial transaction tax that developed countries and other Organisation for Economic Co-operation and Development nations have imposed to stamp out speculative behaviour in the financial markets. In these countries, the financial transaction tax is on average less than 0,5%. As a country that badly needs growth, it doesn’t make any sense to impose a tax that reduces economic activities.
Third, it is also worth remembering that electronic transactions were a robust and effective way of dealing with the perennial cash shortages. Thus, the growth of electronic payments such as point-of-sale transactions, real time gross settlement (RTGS) transfers, and mobile money transfers on platforms such as EcoCash, Telecash and OneMoney is supposed to be celebrated as one of the few innovative ideas that came out during the dark economic times.
The government should be the leader in ensuring the growth and popularity of electronic payments, rather than use it as a cash cow to finance public expenditures. An electronic transaction tax is most likely to expensively prohibit its use by the poor and most vulnerable people in our society, an increase in the demand for cash transactions, further destabilising the already vulnerable cash market which is in short supply.
An electronic transaction tax is tantamount to eroding the rights of the poor to take a meaningful participation in economic activities, without a meaningful substitute to rely on. Fourth, the transaction costs of the electronic transfer are already very high. In 2015, for example, in order to transfer US$100 from one party to another through EcoCash, one incurred estimated fees between the parties in the upwards of US$10.
Thus imposing another 2% tax on these transactions makes it prohibitive and expensive. Also, banks and the credit and debit card companies charge high fees for electronic transactions. Imposing a tax on a market with already prohibitively high fees is very counterproductive. Its effect is to squeeze the low margins for the small businesses.
For example, if the profit margin for a firm is 2%, an increase in the cost of doing business for that firm by 2% is most likely to wipe out their margins. That means firms will be forced to double their prices in order to get back to the original margins, a case we have witnessed since the introduction of the tax.
Fifth, Cross, an advocate of the tax, confused the money and economy wide multiplier. This is something a person learns in economics in undergraduate 101 class. For instance, if an individual grows tomatoes, sells them for US$100, and then electronically transfers it to her mother, who in turn takes the same US$100 and transfers it to her sister, and the sister takes that US$100 and electronically transfers it to her own daughter, who uses it to pay school fees.
The economic multiplier of the US$100 that was produced from selling tomatoes is twice as much, which is the US$100 of purchased educational services. That is the growth of tomatoes led to the doubling of output in the economy, i.e, two products were produced in the economy — tomatoes and educational services.
However, the total value of electronic transfers is $400. In reality it was the same US$100 that changed hands four times. It means that most electronic transfers that occur is as a result of money being loaned between people without an underlying beneficial economic transaction taking place. Thus putting an electronic transaction tax is most likely to lead to double and triple taxation because there is no way of distinguishing between primary electronic transactions that justifiably need to be taxed and the secondary transactions.
Cross rightly points out that in 2017, the electronic transfer system handled more than $110 billion — five times our GDP estimated at $20 billion. This is in line with the magnitude of electronic money transfers such as the United States in which more than $5 trillion of electronic money transfers support a $1 trillion economy.
However, for him to suggest that the Zimbabwe economy should have been about $55 billion in 2017 and that many people are evading tax, is incorrect and pulling a rabbit out of the hat.
Sixth, there are some exemptions to this tax. One is tempted to ask if something is too good for the gander, why should it not be good for the goose? By exempting other sectors and businesses, the government is deliberately picking winners and losers. It’s not right in the public eyes for the State to pick and choose winners and losers. It’s also open to abuse and corruption in which the powerful and the politically connected would lobby for the exemptions as well.
The proponents of the tax argue that its aim is to broaden the tax base, but what they hide from the public is that firms and individuals who already pay tax are not exempt from this extra burden, thus making them internationally uncompetitive.
In public finance, there are proven ways of broadening the tax base by including the informal sector. These include requiring informal businesses to be registered by paying fees in order to conduct business, directly taxing the products that they use for their businesses, imposing tariffs and fees at the border for their imported goods and also imposing export taxes on them when they export.
Finally, on paper, taxing electronic transactions might make sense for governments to raise funds. But in reality, I believe that Ncube and other policymakers are misguided. Their misguided tax policy coupled with the monetary policy requirement that banks separate bond notes and RTGS transfers from the foreign currency accounts have assured a potent cocktail that has instituted a financial and economic crisis reminiscent of the 2008 debacle. Therefore, this note is a plea for cool heads to prevail and save Zimbabwe, bringing it once again to its rightful place as a jewel of the world.
Tendai Kamba writes in his personal capacity