REASSESS CORPORATE TAX POLICY

GOVERNMENT must reconsider its stance on the issue of corporate and personal income tax. The recovery of the economy depends on it. As it is, corporate tax contributes a measly 9 per cent to government’s revenue while personal income tax, also known as pay-as-you-earn (PAYE) contributes twice the amount contributed by companies amounting to one fifth (19 per cent) of total government revenue.

In short, individual income taxpayers are the majority shareholders of the G-wallet. Individual taxpayers are literally responsible for all the development that is funded through the G-wallet, even more so considering the fact that individual consumers also pay value added tax (VAT), which also contributes another 18 per cent to total government revenue.

Eswatini now awaits the much anticipated economic recovery strategy, which hopefully will get the ball rolling on turning our economy for the better. The economic recovery strategy will for one provide the policy direction on how the newly appointed Mandvulo-led government intends to rescue the economy out of the gutter. Government is banking on private sector companies in an export driven economy to grow Eswatini out of the 2 per cent economic growth glass-ceiling and catapult everyone to Vision 2022. In other words, government wants to grow the 9 per cent contribution by private companies by cutting corporate tax by more than half to 12.5 per cent. This, the minister of Finance must reconsider!

Recently I took the liberty to investigate how Eswatini’s current 27.5 per cent corporate tax rate compares to other countries. I mean, even the European Union (EU) is now bullying the country insinuating that the current corporate tax rate is choking business growth and development in Eswatini. Well, here are some select figures on corporate tax in the EU: France 33 per cent; Spain 25 per cent; Norway 23 per cent; Sweden 21.4 per cent; Finland 20 per cent; United Kingdom 19 per cent; Switzerland 17.9 per cent and Germany 15 per cent.

Economies

Yes, these are matured economies but they are certainly getting their money’s worth from their private sector companies. Take the land of the free, the USA, which always sings tax cuts, the corporate tax rate there is 21 per cent with some businesses paying as much as 35 per cent. In Africa, we are competing with 28 per cent in South Africa, 22 per cent for Botswana, 25 per cent in Lesotho, 30 per cent in Kenya, Tanzania, and Uganda. Hopefully, you get the drift; none of these countries are playing with corporate tax below the 15 per cent let alone 20 per cent level. Countries that play around with zero or ultra-low tax rates have either rich mineral resources like oil such as in Saudi Arabia, Qatar or the island like Bermuda, The Bahamas, and Camay Island, etc, where rich folk go to hide their cash.

But I get where our government is coming from. Logic has it that if a country lowers corporate tax rates, more companies will flock in to set-up shop and hire more people. Here is some food for thought: Economic development is determined by economic factors and non-economic factors. Economic factors include; capital formation, natural resources availability, economic systems, conditions in foreign trade, and marketable surplus of agriculture. Non-economic factors include human resources, technical know-how and general education, political freedom, social organization, corruption, and the desire to develop.

Our government is high on supply side economist Arthur Laffer, which states that lower tax rates boost economic growth. Laffer’s theory supports that the more an activity - such as production - is taxed, the less of it is generated. Likewise, the less an activity is taxed, the more of it is generated. Eventually, if tax rates reached 100 per cent, all people would choose not to work because everything they earned would go to the government. This means that after a point it is counter-intuitive to keep increasing tax rates, what is known as the ‘tax prohibitive range’. 

Herein lies the key: tax cuts work best in the prohibitive range by increasing consumer spending and demand. Government would like to be at a point where it collects maximum amounts of tax revenue while people continue to work hard. Therefore, government must reassess its stance on whether it should and how far it can cut corportate tax because Laffer avoided some key points that either make a tax cut effective or simply ineffective. Whether tax cuts stimulate the economy, is conditional because of these factors; the type of tax system in place; how fast the economy is growing; how high taxes are already; tax loopholes; the ease of entry into non-taxable, underground activities, and the economy’s productivity level.

Any of these factors can prevent tax cuts from stimulating economic growth. Do we know where we are in terms of these factors in Eswatini? Will the corporate tax cut guarantee growth and more government revenue? Or will the individual taxpayer have to pick up the bill yet again when the private sector fails to grow as anticipated?

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