I was re-reading over some old articles I have collected and I thought this one was worthy of discussion. Broadly it relates to the manner in which taxation keeps poor people in poor countries impoverished. In particular the article looks at Ethiopia.
But what about the starvation in the countryside. Is it all “drought”? Here I find in the tax material supplied to me by Charlie Rangel, which of course he has never read, is the tax code on agriculture:
(a) Computation of taxable income Income from agricultural activities is usually calculated by reference to the price of the crop before harvest. If the crop is sold, the selling price is used as the basis for assessment.
(b) Special deductions for farmers When a farmer’s income exceeds ETB 600 [$68], he is entitled to make the following deductions from gross income in order to determine taxable income:
— any fee payable (e.g. rural land fee);
— all costs incurred in the production of the farmer’s income;
— depreciation of movable and immovable assets used in the agricultural activities…
(c) Rates of tax
Taxable income (ETB) Rate (%)
Up to 600 ($68) 10%
Over 36000 ($4235) 89%
That’s right. A marginal tax rate on agricultural profits of 89% at $4,235. The tax system in Ethiopia is designed specifically to bring about the starvation of the entire population of 67 million. Can you believe a “corporate farm” that has a profit of $4,235 in annual income must pay the government 89% of any dollar of profits over and above that amount? How can this happen? This is of course outside the realm of economics and deeply into the realm of politics.
The dollar figures are US dollars.
Lets say you are an Ethiopian farmer. If you decide to invest some time, effort and resources improving your output then you will assume all the risk. However if you are successful the government will assume 89% of the benefit. In such a political environment it rationally makes more sence to wait for the government to make an investment rather than take the risk yourself. As a result nobody every builds any buffer to deal with the bad years. What makes this even more tragic is that Ethiopia is a fertile country that could be a bread basket if policy permitted.