LUCKY CORPORATIONS!

I can understand why the Minister for Finance thinks cutting down corporate tax by more than half from 27.5 per cent to 12.5 per cent could stimulate the Eswatini economy.

After all, the minister is an accomplished businessman and has his business interests to look out for, that is, take care of his corporate profits! Nice!
True, cutting down corporate tax has its benefits. Economic evidence suggests that corporate income taxes are the most harmful type of tax, and workers usually bear the brunt of the corporate tax burden.

Reducing corporate tax can attract new investments into the economy and discourage profit shifting by very experienced corporations. New investment can increase the total capital stock available in the economy and thus, improve production and productivity. As more and more investments grow the size of the capital stock, the demand for labour to work with the new capital stock also increases, leading to higher production and productivity and higher employment and wages over time.

So yes, a reduction in corporate tax can attract more companies to set their businesses here in Eswatini, and in the process employ more people and result in a bigger private sector that can outspend government. Taxation plays a pivotal role in deciding whether to deploy capital (such as machines, equipment and factories) as well as influencing people’s decisions on their willingness to work more.

All of this contributes to total output in the form of gross national product (GNP). The GNP is a measure a nation’s wealth and is a function of consumption, investment spending, government purchases and net exports.

Mathematically, GNP = C + I + G +NX where:
l C = consumption spending by individuals
l I = investment spending on machinery, factories, etc.
l G =government purchases
l NX = net exports

By slashing corporate tax by more than half, government has taken care of the investment portion of the GNP equation. The argument is not that cutting corporate tax is good or bad for the economybut more so is cutting corporate tax by 54.5 per cent pinned on justifiable economic reasons. Why not cut it to 20 per cent instead of the 12.5 per cent? Yes, investments are sensitive to taxation because capital is mobile and companies can easily move their operations to locate their investments in countries where there is a lower tax burden on thecapital.

For the worker, taxation is a different story. It is much more difficult for a worker to uproot his or her family to a lower tax bill country.  The worker carries the tax burden on all ends. If the government increases corporate taxes, the employer can push the burden to the worker through lay-offs and or by cutting down on wages. On the low wages, workers still have to pay income tax, which also contributes to total government revenue from which government can make purchases as described in the GNP equation.

If the companies that set up shop here in Eswatini are able to produce for export and increase our foreign currency earnings, then the net export part of the equation becomes positive and large which increase total GNP. However, we all know that most of the companies that settle in Eswatini import more than they export and so we could have a lot of foreign companies setting up shop here just to push down our throats goods produced outside of the kingdom that stimulate real local economic growth. However, the other biggest problem is that the minister has completely forgotten about the consumption (C) part of the GNP equation.

Eswatini also needs C, that is, consumption to be large in order to increase GNP. Typically, consumption by individuals equates to more than half of GNP, and consumer spending equates to aggregate demand in the economy. Since the Minister for Finance has chosen to increase taxes on all ends facing the consumer (income tax, electricity, fuel tax, sin tax, etc.), this will lower disposable incomes, thus depressing the consumption part of the GNP equation.

The minister only focused on supply side tax cuts to stimulate capital formation and forgot about lowering taxes for the consumer to raise disposable incomes in order to increase GNP. Being in charge of the Ministry of Finance Portfolio means the Minister has to balance the supply and demand equations on all ends to take care of the needs of all sectors of the economy and improve the welfare of all emaSwati, not just the lucky corporations.Give the individual consumers their cut!

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