High taxes lead to more poverty, underdevelopment

High taxes lead to more poverty, underdevelopment
Published: 23 October 2018 (127 Views)
WITH the introduction and effective operation of the 2% tax on cash transfers, the poor households in Zimbabwe will remain in abject poverty.

This tax will hit poor households the hardest, as they spend a larger share of their incomes through transfers because there is no cash in the economy.

With Econet Wireless Zimbabwe's customer surging to over 7 million connected users from 6,4 million in February, the cellular giant has the capacity to rise further to 8,5 million customers.

In addition, EcoCash as of November 2017, was reported to have 6,7 million registered users, compared with two million conventional bank account holders in the country.

It controlled 99,8% of the mobile money market in Zimbabwe as of November 2017.

During the first six years of existence, the service processed over $23 billion. Now many of the groups of people participating at this platform are mainly poor households who do not have the capacity to open formal bank accounts.

Since these poor households have challenges to open proper banks accounts, especially in the rural areas, they were now used with cash to perform various transactions to buy goods and essential services.

Given the liquidity challenges in Zimbabwe, poor households in the rural areas were now depending on mobile phone money to buy basic commodities.

The introduction of EcoCash was a relief to the poor households. However, the introduction of this 2% tax will affect these people and the problems of inequality are thus made worse.

Zimbabwe ranks among some of the highest taxed in Africa, if not the whole world.

Even though tax revenue is a necessity for financing government expenditure, too much tax is an ingredient to poverty and underdevelopment due to its impacts on aggregate demand which will eventually affect investment negatively.

In Zimbabwe, the puzzle is even confusing due to the fact that the government is increasing taxes which affect both consumers and businesses.

The much-anticipated foreign direct investment is sensitive to increases in taxes. Usually investors invest more in communities or countries where taxes are low. Therefore, the news that Zimbabwe is open for business needs serious consideration on taxes which are being imposed on the poor households and struggling businesses.

Taxes can be progressive or regressive. A progressive tax is defined as a tax whose rate increases as the payer's income increases.

That is, individuals who earn high incomes have a greater proportion of their incomes taken to pay the tax. A regressive tax, on the other hand, is one whose rate increases as the payer's income decreases.

But in Zimbabwe, some of the taxes now introduced are affecting the poor more than expected. Taxes should be imposed in order for the government to fund programmes which assist the poor, but with the 2% on every dollar transferred, the poor will suffer because they will contribute more of this tax.

The worrying reality is that, poverty in Zimbabwe is on a rise, The World Bank estimated urban poverty in Zimbabwe in 1995 to be at 12% while the 1995 poverty assessment study found urban poverty to be 39%.

In January 2009, Save the Children estimated that 10 million out of 13 million Zimbabweans, over 75% of population were living in desperate poverty.

In April 2010, the United Nations Children's Fund noted that 78% of the Zimbabweans were absolutely poor and 55% of the population, about 6,6 million, lived under the food poverty line in December 2009.

The Zimbabwe Interim Poverty Reduction Strategy Paper (IPRP) (2016-2018) also noted that income poverty, as measured by the proportion of people whose income is less than the total consumption poverty line (TCPL) in Zimbabwe remained high, generalised and almost constant at above 70% since 1995.

The increase in poverty over the years was generally in line with the fall in production in the agricultural sector.

Since most of the agricultural activities are more confined to rural sector, during the years from 1980 rural poverty was also increasing.

IPRP (2016) estimates that 92% of the extremely poor population and 91% of the extremely poor households reside in the rural areas.

The proportions of poor population and households in rural areas are also high at 80% and 78% respectively (IPRP 2016).

This was also highlighted in the Millennium Development Goals progress report of 2012 that 76% of the rural households are considered poor compared to 38,2% of urban population.

On individual poverty, the report highlighted that, 84,3% of individuals in the rural areas are poor compared with 46,5% in urban areas.

Poverty is very high in Zimbabwe policies which affects the poor must be scrutinised before they are imposed.

David Mhlanga is a doctoral fellow in Economics North West University South Africa. He can be contacted on dmhlanga67@gmail.com

- newsday

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