Restarting Tax System Reforms Crucial to Fill Economic Resource Gap

In purely macroeconomic terms, the years between 2004 and 2011 speak much about the efforts that the Revolutionary Democrats have made to change the structural bases of the very economy they oversee. It may be because of the sweeping changes that happened during this time that they would like to turn the economic reference time of their leadership to only 12 years, instead of 23. They surely are not proud of their job in the decade before.

If one has to be honest in the assessment of the decade before 2004, though, there were enough challenges that limit the performance of the government under the leadership of the EPRDFites. The job of restructuring the war-torn economy and consolidating it in the face of the pertinent headwinds of political instability, paucity of resources, brain drain and undeveloped leadership capability was indeed tough. Hence, growth was mediocre. There was nothing more than a marginal positive gross domestic product (GDP) growth, in the order of two or three percent, which could be considered as an upshot of hope for the ruling EPRDFites.

Of course, they too were not as focused as they ought to be on the economy. Their major preoccupations were largely political. Their prism was tainted with political rationales that even macroeconomic discussions often turn into purely partisan deliberations.

It took two droughts, a political infighting, a war with Eritrea and two national elections to reorient the radar of the Revolutionary Democrats away from politics to economics. If one has to weight the magnitude of the push and pull factors for the change, then, the balance for the shift certainly goes in the direction of the push factors. Even then, it was not too late for them to do the right thing.

This ‘economic awakening’ of the Revolutionary Democrats was accompanied with formulation of economic policies and execution of the same. Subsequently, the bureaucracy witnessed huge restructuring and reorientation. But the changes were not favourable to the bureaucracy as they were to the economy. After all, the bureaucracy needed to acquaint itself with key skills that would enable it to manage the economy well.

But it was only in 2004 that the economic upshots started to gain enough momentum. A time series analysis of the performance of the economy since then shows that the changes implemented by the Revolutionary Democrats were, by and large, successful.

A showcase to this is the reorientation of the resource dependence of the economy towards local resources. The tax to GDP ratio, for instance, started to gain magnitude so fast that it went away from its historic low end. Complementing the increment were the multiple initiatives meant to modernise the tax system.

It all went promptly. The ratio that stood below five percent for over six decades slowly toddled to 10pc in 2010. It even went slightly above the ten percent mark in 2011. For an economy that was heavily dependent on aid, which, according to some estimates, contributed about 40pc of the total annual resource supply of the economy, this change was indeed historic.

Much has changed since then, though. The double digit growth the economy has seen over the past decade has put the efforts of the ruling ERDFites to the global limelight. Their success in terms of putting the economy on the growth trajectory has become a fact that is undeniable even by their opponents.

Lately, though, the progress that had been witnessed in the eight years since 2004 has started to regress. This is especially so with tax administration.

Latest figures, by both the government as well as international financial institutions, show that key indicators of local resource mobilisation are witnessing significant deceleration. For tax to GDP ratio, an important macroeconomic indicator, the case has been a decreasing rate of growth.

It remains to be true that Ethiopia’s is an economy with huge untapped tax potential. A comparative analysis of the tax to GDP ratio of countries in sub-Saharan Africa shows that Ethiopia is one of the laggards. Standing at the lower rungs, then, the nation has huge potential to improve its status.

This is the timely task not only for Beker Shale, director of the Ethiopian Revenue & Customs Authority (ERCA), and his compatriots, but also the core political leadership as a whole. And it takes restarting the reforms that seem to have gotten stuck.

Improving the local resource mobilisation stance of the nation entails expanding the tax base, making tax compliance less costly, creating a tax system that is accessible to taxpayers and establishing responsive compliant systems. Over the past four years, the tax system has seen no significant improvements in all these fronts. Some of the aspects have even seen regression.

Instead of focusing on expanding the tax base, tax officials spend much of their time in squeezing the narrow base they managed to establish over the past decade. This has created considerable disappointment from taxpayers as they rightly know that there is a huge forest that tax officials ought to focus on, instead of the few trees in their proximity.

This bias extends to the whole economy as tax relates to profits and prices. As it stands, the playing field is lopsided against registered traders as they are defeated by the price cuts unregistered traders introduce to the market. Nonetheless, tax officials avoid this bias and focus on pressing registered traders.

What is even worrisome is the high cost of tax compliance in the nation. Compliance takes longer time and multiple procedures in Ethiopia than in any other sub-Saharan African country. The system is too cumbersome to live with. It also is not easily accessible.

As fundamental theories of tax state, compliance is a tight trade between the cost of living up to the laws and that of avoiding them. An outstanding tax system, therefore, is the one that makes living with the laws less costly. Certainly, this relates to institutional structures and operational flexibility.

By and large, the Ethiopian system is lagging in this front too. The tax system remains cumbersome, unresponsive and opaque. There is huge information asymmetry within the system that opportunities for interpretation and corruption are rife.

The compliant hearing system disempowers taxpayers. Not only are taxpayers required to deposit 50pc of the claim to move to the revision process, but this deposit constitutes interest and penalty. Making things even complex is the fact that the system, albeit unfairly, associates tax clearance with business license renewal.

Furthermore, much of the system still lives in paper age. Compliance, therefore, requires a lot of paperwork for businesses. This happens regardless of the considerable modernisation that tax systems across the world has seen in relation to technological applications.

Surely, all these aspects ought to change if the nation’s economy is to witness improved local resource mobilisation. It, therefore, is essential to initiate comprehensive tax system reforms with the aim of expanding the tax base and making compliance less costly.

As experiences of the past decade show, though, this is not something that could be left to tax officials, such as Beker. It rather is an issue that needs the attention of the core political leadership.

It is obvious that there cannot be sustainable economic growth without modern and reliable tax system. Creating such a system is, therefore, in the interest of the ruling EPRDFites as their reign is closely associated with the economy.


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