Taxoeconomy and inflation in Ghana

Throughout the world, Governments have collected taxes for national developments and Ghana is no exception.

However, taxes introduced by the NPP Government by the Akuffo-Addo and the Bawumia-led administration since 2017, have turned Ghana’s economy into a Taxoeconomy.

Taxoeconomy is an economy which is overburdened with taxes to generate government revenue; in other words, an over-taxed economy. As a result, there is a correlation (relationship) between tax increases and inflation in the country.

Well, it is known that taxes are necessary to raise revenue to fund development and alleviate poverty. However, a plethora of abnormal levies at a time of recovery distorts and is self-destructive to the standard tax regime

Meanwhile, in Ghana, there are a lot of taxes such as the Value Added Tax (VAT), National Health Insurance Levy (NHIL), Ghana Education Trust Fund (GETFUND), National Stabilisation Levy (NSL), Energy Sector Levies Act (ESLA) before coming to power of Akuffo Addo/ Bawumia administration.

Taxes are costs to businesses and higher consumer prices. VAT is not a tax on businesses. It is a tax on consumers. Let’s assume that a VAT of 12 per cent is increased to 15 per cent. And if a consumer purchases goods worth GH¢200.00, the consumer tax bill will now be GH¢6.00 plus total cost of the goods, which is GH¢206.00 instead of GH¢203.00.

Example:     12        X   200.00 =24.00……………………..(1)
12% VAT ˃100

15% VAT ˃15 X 200.00=30.00 ………………………….. (2)

Therefore; the difference is GH¢6.00, that is GH¢30 -24= 6.00= causing inflation. Inflation is defined as a general rise in the prices of goods and services  in a particular country resulting in a fall in the value of money.

Thus, one would argue that Ghana’s economy is in an inflationary spiral of price increases – a continuing situation in which an increase in one causes an increase in the other.

Tax bills affect businesses and cause unemployment. Tax Bills such as Excise Duty and Excise Tax Stamp (Amendment) Bill, 2022 and the Growth and Sustainability Levy Bill, 2022 could and would result in businesses passing the increased duty on to consumers through price hikes, which could and would result in inflation.

Businesses are already dealing with challenges such as the high cost of water and electricity; such tax bills would further increase their operational cost of doing business in the country.

Among other tax bills is the Income Tax (Amendment) (N0.2) Bill, 2022. This bill is targeted at bolstering the sustainable generation of domestic revenue for the country. In a situation whereby businesses failed to pass the taxes on to consumers, they tended to reduce the cost of production, cut back on labour and all these further worsen unemployment levels in the country.

At the same time, in introducing these tax bills, there is difficulty in exacting levies from the petroleum and mining sectors of the economy due to stability clauses and additional cost of rendering services to customers in the various financial institutions.

This is due to the fact that for mining and petroleum companies, the stability clauses provide that no change in fiscal legislation shall affect them until after their stability period that depends on their agreement.

The cost of production which reduces their profits would impact and affect negatively the corporate taxes.

Meanwhile, an American economist, Arthur Laffer, developed a bell-curve analysis in 1974 that plotted the relationship between changes in the government tax rate and tax receipts.

The analysis is known as the Laffer curve. It suggests that taxes could be too low or too high to produce maximum revenue and that both a 0% income tax rate and a 100% income tax rate generate $0 in receipts.

The Laffer curve follows certain logic because tax revenue does not always increase whenever the tax rate increases. Of course, the government collects no income when the tax rate is 0% but imagine a situation where the government collects 100% tax revenue.

All earnings would then be remitted to the government so there would be no incentive for workers to remain employed. Laffer countered that taking more money from a business in the form of taxes means the less money the business will be willing to invest.

A business will find ways to protect its capital from taxation or to relocate all or a part of its operations overseas. Workers lose the incentive to work harder when they see a greater portion of their salaries taken for taxation.

Finally, Laffer argued that this means less total revenue as tax rates rise and that the economic effects of reducing incentives to work and invest by raising tax rates would damage an economy.

The writer is an economist
agbaga@yahoo.com