Economies have been implementing tax reforms to enhance government revenue. Tax reforms consider multiple taxes based on price elasticity of demand ideal for developing countries to generate revenue for wide coverage of tax payers.
Based on studies tax with inelastic demand include property tax, taxes on conspicuous consumption, punitive income, inheritance, tobacco, cigarette and alcohol etc. These taxes are important as they can generate revenue at progressive rate.
Again when the use of a good or service causes negative externalities, the standard prescription is to levy a Pigovian (corrective) tax at progressive rate. Example- alcohol use leads to road accidents, family stresses, and hospital costs. Tobacco use is unpleasant for non-smokers, and increases the demand for publicly supported health care.
Smith (2005) identifies three key policy issues in taxing alcohol including the revenue-raising efficiency of such taxes, their potential role in correcting negative externalities, and their distributional incidence.
Again for long, tobacco has been considered an ideal for taxation as it is not a necessity. It is consumed widely and demand for it is relatively inelastic, so it is likely to be a reliable and easily administered source of government revenue.
Among other recommended taxes in an article, Matthew Yglesias, an American journalist, argues for punitive income and inheritance taxes. His logic is that these taxes can have benefits beyond just raising government revenue. By deterring the high pay and large bequests that encourage socially harmful inequality, they can be beneficial even if nobody pays them.
Tax Policy Rwanda
Over last five years Rwandan tax laws are undergoing reforms in different areas. The main objective of these reforms is to boost domestic revenue. Some tax laws that aim at increasing revenue include- Decentralised tax law with particular focus on property taxes; consumption tax law (Excise duty law). The focus of the amendment includes excise duty on beer, wines, liquors as well as mobile data.
For widening tax base in Rwanda the new income tax Bill introduced a tax on sale or transfer for free of immovable property of five per cent of sale or market value of the immovable property.
African situation
Most countries in Sub-Saharan Africa have high budget deficit and tax revenue in sub-Saharan Africa account to less than a fifth of their GDP. These countries have low incomes and non-tax revenues tend to be volatile, which is making their finances less stable and predictable. Recent tax reforms among African countries are aiming to expand tax base through wide coverage using direct and indirect taxes.
Among Direct taxes Property tax has been considered as the ideal source of income for municipal governments in some African countries.
In Ethiopia, Mozambique, the Comoros, and several Nigerian states, municipal governments raise a presumptive levy on buildings based on size and location, simplifying the system to a degree where it is both transparent and easy to administer. In Burkina Faso the national presumptive residence tax is determined by housing characteristics and the supply of local public goods.
Among indirect taxes, taxes with low demand elasticity for tax include tax on tobacco and alcohol. In countries like South Africa, Nigeria, and Zimbabwe tax on alcohol and cigarettes has registered a significant hike over past few years. In Rwanda taxes on alcohol, cigarettes attract 30-70 per cent excise duty.
Uganda over past few years has witnessed an increase in revenue due to increase in tax rate on alcohol and tobacco products.
The International Monetary Fund (IMF) recommended a 100 per cent increase in excise duty rates imposed on all alcoholic beverages and cigarettes in Nigeria to conform to global norm.
In Nigeria new tobacco excise duty rate includes N20 per pack of cigarettes plus a 20 per cent ad-valorem rate in 2018. In 2019 and 2020 this rate is going to further increase.
Recommendations
Among direct tax there is need that property tax should be reformed in Africa. If local authorities simplify the assessment of rates, make taxpayers aware of the benefits of compliance and address political resistance from wealthy property owners, a tax on land and buildings could strengthen local political and economic development.
Among indirect taxes high taxation on tobacco and alcoholic products are ideal for progressive rates. There is need for revenue planning to enhance revenue through tax revision rates in direct and indirect taxes. Taxes on punitive income are not very in Africa common but have potential for raising revenue.
The writer is a Kigali based economist and consultant.