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SMEs, informal sector may thrive on flat-tax code
2005-05-25 08:22:45
By Editor
One of the obvious obstacles which have hindered in a big way the development and growth of entrepreneurship is the indiscriminate imposition of orthodox, but unfriendly, multiple and complex tax codes.
This problem is not unique to Tanzania or particular to similar developing countries alone.
Even richer countries like the United States have complicated tax systems whose end result is squandering of resources.
Practice attests that as a country’s tax system becomes more complicated by the day, the cost of compliance, administration and enforcement can be outrageous.
Even more disappointing is the failure of clotted tax systems like ours to discriminate the incidences of the various tax codes between sectors.
Those that are deemed to be potentially able to generate jobs, skills and produce goods and services for the export market are fiscally treated in similar ways to those that aren`t.
In the upshot, they become inbuilt macro-economic disincentives to the growth of some critical sectors of the economy.
But the divergence of theories of public finance economics and conventional practices have put breaks on some useful fiscal ideas which are now increasingly being envied for their success in some parts of eastern and central Europe.
A model country is Estonia whose economy is said to have flourished due to the application of “flat-tax” on personal and corporate income.
Its success seems to have ruled out the progressive tax principle based on the virtue of fairness.
A flat-tax on personal income combines a threshold (that is, an exempt amount) with a single rate of tax on all income above it. The progressivity of such a system can be varied within wide limits using just these two variables.
Whereas in the pay-as-you-earn system (PAYE), there are no ‘income bands’ that are treated discriminately, the flat-tax does just that.
The economic geography of Estonia is much smaller and their operative systems are much more complete than ours. Thus, an outright adoption of a similar measure on the spur of the moment may not be a logical pursuit.
However, it`s not a bad idea for fiscal think tanks to start pondering how we can best apply flat-taxes in the growing informal sector as well as in small and medium enterprises (SMEs).
The two areas have proven immense potentiality for creating wealth and reducing poverty.
The focus of the move should target at how to reduce incentives for those who grow rich in the two areas to avoid tax as well as minimising the opportunities to do so.
The practice in Estonia shows that under the flat-tax regime, the rich usually pay about as much as they do under an orthodox code.
This radical simplification could be more suitable to SMEs and informal sector productive areas owing to their inherent incapacity to keep books of accounts proper, while its cost of management is significantly more reasonable.
If we are serious about fostering the growth and prosperity of both SMEs and the informal sector, the tax codes for them shouldn’t be seen to be burdensome.
The suggestion under the flat-tax practice is to take the two sub-sectors as ‘bands of income’ and design thresholds that are liable for review over time.
Definitely, there are things the flat-tax cannot do and questions which it cannot answer.
But the gains from radical simplification of the tax codes applied for the two areas are potentially huge. We better give it a chance, may be beginning on a pilot basis and later try more comprehensive applications.
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