issue 173 - July 1987
Popular myth has it that poor peasants and casual
workers in the Third World do not pay tax. John Tanner
argues that this is far from the truth and
it is other fish that slip the net.
Playing hide and seek with the tax collector is a popular game. For many, paying taxes is at best a necessary evil, at worst a legal way for the Government to steal your money. Tax is about as popular as a trip to the dentist or a dose of malaria.
From the rice levies of the Chinese Emperors to the Boston tea party, taxation has raised hackles. Too often it has been used as a weapon of oppression. In Hailie Selassie's Ethiopia, until the 1974 revolution, peasants paid up to three-quarters of their harvest in tax plus another tenth as a tithe to the Coptic Church.1
Apart from such feudal anomalies most people in the South - the urban poor and the peasants in the countryside - appear hardly to be touched by taxes. After all, few are burdened with having to complete annual income tax returns. But, in reality taxation bites deeply into their lives.
This is because the tax systems of the South are very different from those of the North. Third World citizens pay less income tax, but there is heavy reliance on 'indirect' taxes - and these are the same whether you are rich or poor.
Third World taxes have grown out of the colonial experience. From 1921, for instance, French colonies were expected to pay their way and build up a reserve. But the imperial powers also imposed taxes to force local people into producing goods for sale.
'Money taxes were introduced on numerous items - cattle, land, houses and people themselves', writes Walter Rodney about Africa. A 'poll' tax - a charge per person regardless of income - was often levied. 'Money to pay taxes was got by growing cash crops or working on European farms or in the mines.'2
Important as hut and poll taxes were to colonized people, the more lucrative source of revenue for the colonizers was taxing exports - raw materials and cash crops. Today, these taxes are still levied by many Third World governments because they are straightforward to collect and hard to evade. They are paid by a small number of people at export shipping centres on goods difficult to conceal. Generally it's not worth the candle to try and dodge the revenue authorities.
Sales taxes are another form of indirect taxation popular in the South. Frequently the sales tax is levied on the importer or the manufacturer because it is easier to collect at source. But it means retailers' profit margins escape the tax net.
A World Bank study in 1986 found that four newly industrialized countries (Colombia, South Korea. Mexico and Thailand) obtained as much as 72 per cent of their revenue from indirect taxes. While in five old industrial countries (Japan, Sweden, UK, US, and West Germany) indirect taxation amounted, on average, to only 23 per cent of the total tax.3
'Direct taxes in the Third World are levied on those who earn salaries. But a lot of rather big business escapes,' says Dr John Hills of the London School of Economics. In Colombia, for example, a 20-year tax exemption was granted to the local Paz de Rio steel mill in 1954. And in the 1960s the Government gave a tax holiday, which lasted 14 years, to the struggling automobile industry. Such help to industry shrinks the tax base.4
Third World elites, as a rule, get off lightly when it comes to paying tax - certainly in comparison with their counterparts in the developed world. Industrial countries in 1980 took 33 per cent of their tax from incomes while least developed countries collected only 17 per cent from incomes, getting most of their revenue from trade and sales duties.5
This system hits the Third World poor hardest The urban poor, who burn kerosene to cook, for example, suffer as the end users if their government puts a levy on imports of petroleum. Sales taxes on basic items, including salt, clothing, tea or tobacco, also place a heavy burden on household budgets.
Sales taxes are usually 'regressive' because every customer must pay the same tax, regardless of their ability to pay. A household survey in Kenya in 1974 found that tax was paid on 77 per cent of the income of the poorest rural group. But the richest rural group, which could afford to save more, paid tax on only 14 per cent.6
In most Sub-Saharan countries, including Liberia, Mali, Chad, Malawi and the Central African Republic, poll taxes have been levied. Again such taxes discriminate against the poor because everyone must pay the same regardless of their actual wealth.
People who make their living in the informal sector are also required to pay all kinds of petty taxes, including business licenses, market charges and fees to government officials before permits can be issued.
In Sudan, for example, farmers wanting to sell their animals are charged Sudan £8 ($3.20) per head of cattle in markets run by local municipalities. The charges are much higher than needed to run the markets because they are an important source of tax revenue.
Before peasant farmers or small-time traders can bring their products to market they usually need to buy an official permit. Taxi drivers and even rickshaw cyclists often face arrest if they have not paid for the correct license. Such fees and charges force many people in the informal sector to operate illegally and run the risk of fines, imprisonment and harassment by the authority.
'The revenue importance of such taxes is small and has been decreasing. The administrative effort involved in collecting them should be devoted instead to improving enforcement of other taxes,' argued a recent International Monetary Fund study.7
For some time the powerful International Monetary Fund (IMF) and its little sister, the World Bank, have promoted 'policy reform' in the Third World, particularly in Africa, a key element is trying to reduce taxation.
The IMF view is that taxation is a burden because governments spend today money that would otherwise be invested by business and peasant families tomorrow, and without such private investment development will be held back.
The reformers go on to argue that taxes on farming, the main activity in the South, have distorted economies of the Third World. 'There is great waste in public expenditure, especially in funding capital-intensive industry,' claims the World Bank.8
In Togo coffee farmers were paid in 1980 only a third of the export price for their crop, the Bank points out. 'In Mali, cotton and groundnut farmers received half the border prices and in Cameroon and Ghana producers received less than half,' it adds.9
But not everyone accepts these arguments. The private sector is not the only part of the economy to invest in the future, say critics of the IMF. Third World governments build roads which help farmers to market their produce and schools which create a literate and numerate workforce. They can provide extension services for farmers and invest in industries to process agricultural products.
The IMF is controlled by governments, such as the United States, Japan and Britain, who claim that the 'free market' is the most efficient way of organizing economic life. From that it follows that any tax, because it distorts the market, must be bad.
But to suggest that the tea plantations of Sri Lanka or the coffee farms of Togo should exclusively benefit from the export of their crop would be absurd. If there is to be government somebody has to pay for it. As it is, governments of developing countries collect far less tax in relation to their gross domestic product than do industrialized countries - 14 per cent compared with 36 per cent for the countries studied in the 1986 World Bank Report.
The debate about who should pay what tax in the underdeveloped world has moved centre stage. Create the wrong fiscal package and a Third World country's chances of development go down the tube. 'Tax reform' is the slogan of the 1980s.
It is clearly unfair that so much tax in the Third World falls on the backs of those least able to pay. Even the World Bank has proposed that in Latin America, where one per cent of the people own half the land, they should pay a heavy income tax. But reform is not simple.
As Prime Minister Rajiv Gandhi of India pointed out, the real practical problem is that the rich will evade very high rates of tax. And once tax evasion becomes a habit it will continue even after lower tax rates are introduced.
But the rich will always be better at hiding from the tax collector than the poor. However good its intentions, a revenue-starved government is one with its hands tied firmly behind its back, able only to gaze into the whirlpool of poverty in which most of its country's people flounder.
Freelance journalist John Tanner specializes in development Issues.
1.Ethiopia, Oxfam, 1985.
2 How Europe Underdeveloped Africa, Walter Rodney.
3 Tax PoIicy etc. in Semi-lndustrlalizad countries World Bank 1986.
5 Richard Goode.
6 Taxation in Sub-Saharan Africa, IMF.
8 World Development Report, 1986.