Where do taxes the Government collects go if we still borrow so much?

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By TOM ODHIAMBO

There has been talk of Kenya having borrowed beyond its ability to repay regularly over some time now. Commentators have castigated the Kenyatta II government for going on a ‘borrowing spree’ since it came to power. Most of these loans are apparently from China. Consequently conspiracy theorists argue that Kenya is basically mortgaged to China. But Kenya isn’t alone. Most African countries are now beholden to Beijing, where they run to annually to beg for ‘development’ loans, ostensibly to build ‘infrastructure’ – a word that mainly means roads in the African context.

Well, China is definitely a generous new lender in town. But Africans have been borrowing ever since they proclaimed their independence. When African leaders assumed power, they inherited economic and financial structures that were designed in Europe. Many of them printed their currencies in Europe. The values of these currencies were pegged on European currencies or the American dollar. In other words, Africa’s economic umbilical cord is buried in Europe (with parts of it in America) and so it can never be free of external economic influences including borrowing, often to stabilize weak economies that are dependent on export of raw materials to the rest of the world.

Which is why taxes and taxation are very sensitive issues in Africa. Considering that many African governments are still unable to raise capital to pay for infrastructure such as roads, bridges, schools, hospitals, stadia etc, taxes are seen as a major source of money to fund such projects. Yet African governments are caught in a double bind. On one hand they would wish to raise taxes and have money in the public purse. But on the other hand, the low levels of economic productivity lead to poor output. The goods and services have little monetary value. You can’t tax people who don’t work because they can’t find work or even when they work their productivity or earning is so little that it isn’t worth taxing.

Yet the colonialists did actually tax unemployed Africans, apparently to make them work. Poll tax and hut tax were nothing but instruments of coercion meant to make Africans find some ‘gainful employment’, and therefore produce excess value, which the colonial state appropriated for its own use. An examination of this history of forced taxation forms the basis of the discussion in Taxing Africa: Coercion, Reform and Development (2018) by Mick Moore, Wilson Prichard and Odd-Helge Fjeldstad.

This book is structured around a series of questions including: why does tax matter; is Africa the victim of global forces in so far as taxation goes; what can Africa do in the face of international tax challenges; does taxation lead to improved governance, among others. These questions are pertinent considering that there have been several efforts across Africa to improve the tax systems; an attempt to modernize the system and align it with the best global practices.

Tax reforms have intended to make the systems simpler, efficient and productive. But is it easy to simplify the taxation system? Can one really eliminate the inbuilt inefficiencies in the taxation systems in Africa? Can African countries afford to change their taxation systems and make them competent in a globalizing world where financial transactions have become more complex and tax avoidance is easier than in the past?

Taxing Africa seeks to provoke discussion among all concerned parties, from the government tax officer to the accountant to the taxpayer on the street. Do taxes matter? Yes, they do because they pay for common services. If one considers that much of Africa remains poor, with many neighborhoods in the countryside and in towns in African countries not having basic infrastructure and social services, then tax collection is necessary to pay for the goods and services. Where there is some form of established authority, either as elected local councils or centralized government structures, there is hardly money to spare after paying for recurrent expenditures to fund any projects that would improve the quality of life of the locals. Taxation, in various forms, is the easiest means of raising the money needed.

However, authorities don’t often explain why the various taxes have to be levied and exactly how the money raised would be used. The tax authorities are seen collecting monies but the citizens don’t necessarily see how the money is spent. On the other hand citizens also make efforts to avoid paying taxes as much as they can, sometimes because they feel they are being robbed by the government. In the end the government adopts unorthodox means to collect taxes. For instance, the government either coerces taxpayers into parting with their money or creates a series of obstacles to access services, such as in the case of seeking a trade license, where the applicant might be required to pay for up to four permits for a single business.

Yet even when the government collects the taxes, a significant portion ‘disappears’ or is simply not collected because owners of businesses are either politicians or government officers or even the tax officers themselves. When this happens, it is the poorer members of the society who carry a heavier tax burden, consequently subsidizing the rich.

Overall the government is then unable to raise enough money to fund its programs. Then, if the government planned development projects, they are guaranteed to fail because of these inefficiencies in the taxation system.

African governments consequently resort to borrowing, from all over, in the name of development programs. Bilateral and multilateral lenders have had a field day in Africa, offering loans at what initially looks to be very good terms but which in the long run turn out to be extortionate rates. African nations are heavily indebted to external and internal creditors because even when they borrow money with good intention, it in most cases ends up being used for other purposes or it is stolen or it funds programs that don’t have any immediate and direct benefit to the citizens. When the money is stolen the culprits mainly stash it into bank accounts offshore or invest abroad or even bring it back into the country under the guise of ‘foreign investment.’ In all these cases, the government is unable to track the money and tax it. Why?

Because international financial practices have made it easier for money to cross borders where it can be converted into other forms of wealth including property, such as houses and farms, or into shares in foreign companies. The different tax regimes in the offshore tax havens also mean that it is probably more expensive to pursue tax on the stolen wealth. Taxing Africa highlights these tax challenges to African countries, with specific examples of how to go about addressing them. However, there is a foreboding sense in the book that until African governments reform the taxation system and limit the wastage in the collection of taxes, as well as use the collected taxes properly, Africans will continue to be taxed but suffer under-development. 

Writer teaches literature at the University of Nairobi