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Tax us fine; but where are the services?

Ramathan Ggoobi

Tax us fine; but where are the services?

Countries that have performed growth miracles in the last four decades, particularly the East Asian Tigers (Singapore, Taiwan, South Korea, Hong Kong and Malaysia), the BRICS (Brazil, Russia, India, China and South Africa) and others such as Botswana, did it by learning to spend wisely; investing in quality education, infrastructure, communication and transport systems necessary to raise productivity.

In Uganda, where are we spending our own money? We have been borrowing to pay government salaries, to buy more tear gas to quell protests staged to demand for services, to buy gunships and fighter jets, to buy more vehicles for ministers and MPs, or to pay current operating costs of government. This is what we call fiscal indiscipline in economics.

Public sector economics teaches us that taking on more debt than a government can comfortably pay off forces it to raise taxes sharply and reduce citizens’ living standards. When our creditors and donors started to blacklist us for failure to spend money optimally and theft of donor funds at grand scales, we are told that tax revenue has shot up which means Ugandans are performing their duty of paying taxes. We have also demanded for accountability of the money we keep paying, and for the services we deserve. However, government has not given us this accountability in a more explicit way. All we are told is how GDP has grown.

Stop “mismeasuring” our lives by GDP

Mr. President, while delivering the State of the Nation Address a fortnight ago, and at the budget reading last week, you read out figures of GDP growth, both actual and potential. You told us that our GDP grew at 5.1% this financial year to a total of about $22 billion.  I don’t know whether you are aware that GDP is one way of “mismeasuring” people’s lives. Before celebrating high GDP growth, did you, for example, know that increase in potholes in our roads may increase GDP through increased consumption of spare parts and fuel due to traffic jams? Since Kampala has become a pothole city, leading to massive traffic jams and vehicle breakdown, it could be one of the reasons our GDP is rising.             

In the last 27 years, Ugandans have been paying taxes but roads continue to decay, health facilities do not have medicines and qualified personnel, electricity is unreliable, commodity prices keep on rising. When we raise our voices demanding for services we get visions to be realized in half a century!

Ours has become a “high-context” society, a term popularised by anthropologist Edward Hall to describe cultures in which people are noisy, quick to make promises that cannot be relied on, and a bit casual about meeting deadlines. Mr. President, you lost the thread the moment you threw away the cautious approach to government spending that you exhibited in 1990s, and resorted to taxing people more to finance expenditures that do not add to the national output.

Beginning in mid 1990s we have seen a switch in the structure of the Ugandan tax system away from direct taxes towards a greater reliance on indirect taxes-notably Value Added Tax, excise duties on fuel, alcohol and tobacco, and a growing range of taxes on producers and consumers.

Although indirect taxes have some potential advantages over direct tax such as income tax and national insurance contributions, notably their flexibility, their less distortionary effect on the incentives to work, and their potential to change both the level and pattern of demand in the economy to meet a variety of government policy objectives, indirect taxes may be detrimental to an economy such as ours.

Regressive impact of indirect taxes

One of the main problems associated with indirect taxes is their regressive impact on the overall distribution of income in the economy. A regressive tax bears down more heavily on lower income households-in effect-the percentage rate of tax paid rises as average incomes fall.

Take the example of the 18% VAT that government has reintroduced on water. We all know that water is a necessity (a good that we can’t live without and won’t likely cut back on even when times are tough). Necessities have a price elasticity of demand (the measure of the responsiveness of the demand for a good to a change in its price) that is close to zero. As average price rises the amount of water consumed remains unchanged, and therefore the share of average household budgets allocated to water consumption will rise.

While announcing the new tax on water during the budget reading last week, the Minister of Finance, Maria Kiwanuka, argued that it should not affect the prices paid by the majority of low-income consumers, as the price of a jerrycan from National Water and Sewerage Corporation (NWSC) will amount to about Shs.40 at communal taps. The minister overlooked the principle of pragmatism. What do the on-the-ground-realities tell us?  

Currently NWSC charges Shs. 1,912 per 1,000 litres of water used for domestic purposes. This is the equivalent of Shs. 1.92 per litre of water. This means that it charges Shs. 38.40 for a 20-litre jerrycan of water. The reintroduction of VAT on water will add Ush8 to the Ush38.40 that NWSC charges for every 20-litre jerrycan of water. This means the new price for a 20 litre jerrycan will now be Shs. 46.40.

Unfortunately, NWSC does not supply water directly to the masses (the poor). Private individuals do buy water from NWSC and supply it to the masses at market prices. Currently, the suppliers of water at communal taps charge at least Shs. 100 per 20-litre jerrycan of water. Some charge as high as Shs. 300 a jerrycan.

The cost of tax on water

Now that this gang of extortionists has heard that government has increased tax, it is going to raise prices much higher, and extort more money from the gullible public, by claiming; “Didn’t you hear the tax?” It, therefore, goes without saying that the total cost of the tax on water might exceed the Shs. 8 billion revenues that government expects to raise. Many low income households might resort to cheaper but insecure spring water, which might expose them to deadly diseases. As a consequence government might find itself spending more money, and applying for supplementary budgets in the future, to contain epidemics. The minister and her team may need to study this distortion before enforcing this tax.

Another way the indirect taxes are affecting the economy is through distortionary redistribution of incomes from the low income earners to the high income earners. It is the rich and other high income earners who own the businesses that pass taxes onto their low income compatriots. Fuel companies and filling stations, tobacco factories, sugar factories, beer companies, and other businesses are all owned by high income people. But when government levies VAT and other indirect taxes of the products supplied by these companies, they pass over the largest proportion of the burden to the buyers.

This is more true because it is a weakness of this government to target a few commodities, such as fuel, whose price elasticity of demand is low (i.e. people do not reduce demand significantly when prices rise). For example, government has reinstated the Shs. 200 tax per litre of kerosene and also increased the tax on petrol by Shs. 50 per litre. What the fuel companies are going to do is to raise the price of kerosene by Shs. 200 or more and that of petrol by Shs. 50 or more, well knowing that the poor and the motorists who respectively demand for these products will have no choice but to buy.

In this arrangement a rich man such as Mr. Sudhir Ruparelia or Mr. Gordon Wavamunno, on top of being the owner of the businesses that have been given a free rein to charge any price they want, will pay the same price per litre of fuel, kilo of sugar, bar of soap, etc as that paid by the poorest man in the country. In effect it is as if the poor is fundraising for these rich moguls. No wonder they are becoming richer as the rest of Uganda remain caught up in the traps of absolute poverty.

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Ramathan Ggoobi

Ramathan Ggoobi is Policy Analyst, and Researcher. He lecturers economics at Makerere University Business School (MUBS) and has co-authored several studies on Uganda's economy. For the past ten years, he has published a weekly column 'Are You Listening Mr. President' in The Sunrise Newspaper, Uganda's Leading Weekly

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