Taxes in Africa II Jude Wanniski October 31, 2003

Memo To: SSU Students
From: Jude Wanniski
Re: Ethiopia

Once again, students, I had planned another lesson this week, but find myself coming back to the subject we covered in last week’s lesson, on how the tax systems of black Africa are impoverishing the people and causing great misery, poverty, disease and death… and that nobody in the West seems to give a hoot. What propels me this week was the Jim Lehrer News Hour on PBS Wednesday night, with reporter Betty Ann Bowser on the scene. You’ve seen the story a hundred times on network TV and PBS. Drought. Famine. Little black children with emaciated bodies, bellies distended, their emaciated mothers explaining that they have no choice but to let some of the kids starve to death so that the others can be kept alive. It made me angry watching the show, angry at myself for not devoting more of my time and energy to fix the problem, angry at the political and business establishment of the USA for not giving a damn about black Africans except for photo ops that suggest something will be done. But I also got angry at the Fourth Estate – including Jim Lehrer and his News Hour – for doing such a pitiful job in trying to understand why Ethiopians who only decades ago lived prosperous, happy lives are now at death’s door.

So I got out the tax data on Africa that Rep. Charlie Rangel’s staff collected at my request and pulled the Ethiopia file.

I began with the personal income-tax as I usually do, because this is where most of the problems have been in the poorest countries of the world – the result of inflation impacting progressive tax systems. The rates and thresholds were terrible, but I was surprised that they were not worse. The top rate of 35% hits at an annual $6780, the 30% rate at $5000, the 25% rate at $3190, the 20% rate at $1900. Then I noticed that the rates are specified for monthly salaries, which means if you are only employed for one month out of 12 and are paid $500 for the month, you can’t average in the 11 months of zero income to arrive at your taxable income. This is a killer in itself. The regulation requires the employer to collect the tax at this monthly basis and pay the tax if the one-month-per-year employee doesn’t.

Then I looked for the exemptions to gross income, i.e., how much you are allowed for your spouse and for your children in arriving at taxable income. I found “ Personal allowances. No personal allowances are available for deduction against income.” Your taxable income is the same as your gross income. Yikes!

Next I checked for Value Added Tax. Well, that too could have been worse. At 15%, this takes a sizeable bite out of what is left from the tax rates on personal incomes, but still leaves a morsel. If the morsel can be developed into a capital gain, that is taxed at 15% on buildings and 30% on shares.

Excise taxes are next in line. An 80% tax on soft drinks. 40% on mineral water. 150% on beer and stout and whiskey. 40% on wine. 75% on tobacco products. 100% on fuel, petrol, gasoline. 100% on perfume. 80% on dishwashers for domestic use. 30% on carpets. 20% on dolls and toys. I’m not kidding. The list goes on and on and on…. 110% on passenger cars, “whether or not assembled,” if displacement is higher than 1800 cc. 40% on video decks, televisions and video cameras, etc. etc. etc.

Okay, so these tax rates smother all investments in industrial activity in Ethiopia. But what about the starvation in the countryside. Is it all “drought”? Here I find in the tax material supplied to me by Charlie Rangel, which of course he has never read, is the tax code on agriculture:

(a) Computation of taxable income Income from agricultural activities is usually calculated by reference to the price of the crop before harvest. If the crop is sold, the selling price is used as the basis for assessment.
(b) Special deductions for farmers When a farmer’s income exceeds ETB 600 [$68], he is entitled to make the following deductions from gross income in order to determine taxable income:
-- any fee payable (e.g. rural land fee);
-- all costs incurred in the production of the farmer’s income;
-- depreciation of movable and immovable assets used in the agricultural activities…

(c) Rates of tax

Taxable income (ETB) Rate (%)

Up to 600 ($68) 10%
Over 36000 ($4235) 89%

That’s right. A marginal tax rate on agricultural profits of 89% at $4,235. The tax system in Ethiopia is designed specifically to bring about the starvation of the entire population of 67 million. Can you believe a “corporate farm” that has a profit of $4,235 in annual income must pay the government 89% of any dollar of profits over and above that amount? How can this happen? This is of course outside the realm of economics and deeply into the realm of politics. What I hope you get from this lesson is some idea of how easy it would be to help Ethiopia get back to the point where it can feed itself and its children with bloated bellies and toothpick arms and legs.

What does these myriad confiscatory taxes produce for Ethiopia's revenues? In a good year, $1 billion from 67 million people. Of that, about $125 million goes to pay Ethiopia's debts to the International Monetary Fund and other foreign agencies, which are roughly $10 billion. Meanwhile, ladies and gentlemen of the press (if you are tuned in), the Bush administration wants $20 billion in grants to rebuild a certain Middle East nation that the US government has destroyed with bombs and embargoes. No loans. Just grants, a good chunk of which will go straight to the creditors of that certain Middle East country. It's enough to make me angry.