Poverty induced by taxation

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.

http://wanniski.com/showarticle.asp?articleid=3028

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.

13 thoughts on “Poverty induced by taxation

  1. I think this is probably a bit of a biased comment. No doubt its a stupid tax, but I’ll just assume that the number of Ethopian farmers that actually earn that amount is close to zero. I’ll also assume that they could save well for the future earning extremely small amounts. I think you’ll find that the main problem with Ethopia in modern times is a government crappy at everything, including not having stupid wars.

  2. I agree that tax isn’t their only problem, but it is certainly one of them. Terje is perhaps biased in his choice of topics (aren’t we all) but I think what he said was quite fair and accurate.

  3. All those who evade tax, here and abroad, I salute you. Tax evasion is a good thing. Thank god for government inefficiency.

    As Milton Friedman once said, if the government were more efficient, we would all be slaves right now.

  4. Actually I’m not sure it was Friedman who said that, but it was someone important.
    Rule of law is probably more important than tax rates.
    People will flout tax on a mass scale if they find it worthwhile to do so – human nature is wonderfully anti-authoritarian when self-interest calls for it. And this self-interest prevents governments in developing countries from looting public funds even further.
    Anectodally speaking, I know a family in India who were counted as the top taxpayer in the city of Delhi a few years ago. This means they were listed as having paid the most tax. Yet this should not have been, because they are very tiny businesspeople compared to many, many others. But it shows the extent to which tax evasion is rife in India. Apart from the self-interest angle, when people know the government will merely use the money to stuff their own pockets tax evasion simply becomes a necessity.
    Even in Australia, every time I hear of government having problems with cracking down on tax evasion, I breathe a sigh of relief – it means we will keep our freedom for a while longer.

  5. Conrad,

    I agree that few farmer in Ethiopia probably earn the US$4500pa required to suffer this tax. Which means that the tax probably yields close to zero revenue. As such one might ask what is the harm in removing it. Although perhaps as you say there are more important things to worry about.

    However imagine that I have a paddock with a group of people in it. And around this paddock I have built a high electric fence. And a passing tourist tells me that this electric fence is bad for the people because they can’t go and fetch the things they need to make their life better. And I say, quite accurately, that is not likely because it is only rarely that I see anybody near this fence and I don’t ever see people heading off in the direction of the things this tourists claims they need. And I state that this may be a stupid fence but clearly it does not explain why these people remain poor. Clearly these people don’t need fence reform, they need to be cared for by those that know what is best for them. Fence reform would merely distract us from addressing the real needs of my people.

    Regards,
    Terje.

  6. Fence reform would merely distract us from addressing the real needs of my people.

    Fence reform. Priceless.

    Don’t fence me in.

  7. Terje,

    I agree that stupid laws (including tax) that don’t affect anyone or are uninforceable should simply be removed, it was just that in terms of stupid things that affect people in Ethopia, I assume that law is far down the list.

    I’m sure you will pleased to know that when I was in HK, they had this debate about racial discrimination laws they were thinking of introducing (2002?) and used such an argument (its pointless having the law), which is of course much more controversial than removing a tax no-one pays, especially in a rich country. I believe in the end they didn’t implement the law based mainly on that reasoning, suggesting that there are governments out there that might have a bit of sense when it comes to this type of logic.

    It would be interesting to see the reaction if you did this here, or at least if someone on one of the major political parties suggested that the piles of villification laws (or other laws, for that matter) are basically useless.

  8. Conrad,

    You assume that removing this tax is down the list in terms of priority. However I assume that an 89% tax on farm produce in an agrarian economy will cause poverty and periodic starvation. I’m not an expert on ethiopia but I have trouble seeing what could be more significant.

    Regards,
    Terje.

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  11. The same thing is happening in Tanzania where tax on fuel is taking much income from the poor who have to struggle a lot to get their little agricultural output produced by hand hoe reaches the market.Poverty is likely to remain amidst people for decades to come unless things change.

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