Heavy tax burden on citizens and businesses unlikely to foster economic growth

The economic landscape of Ghana has been significantly shaped by tax policies implemented since 2017. Under the guidance of the Economic Management Team, led by Dr. Bawumia, the government has introduced more than 40 new taxes, broadly impacting various sectors and demographics. These fiscal measures, intended to bridge revenue gaps and meet budgetary targets, have infused the economy with a variety of financial burdens. This article evaluates the adverse implications of these excessive taxation measures on businesses and households and argues that such fiscal strategies are unlikely to foster sustainable economic development.

Crucially, the application of high taxation rates in an attempt to stabilize fiscal deficits often triggers a cyclical economic problem. High taxes lead to decreased consumer spending and business investment, which in turn can result in lower overall economic activity. This decrease can dampen economic growth, reducing the total tax revenue collected by the government. In response to this shortfall, the government may feel compelled to introduce even more taxes or increase existing ones, perpetuating a cycle that can stifle economic progress and innovation.

This cyclical effect illustrates the counterproductive nature of excessive taxation, suggesting that it may ultimately undermine the very revenue goals it aims to achieve. Through this expanded discussion, we will explore how such policies, while well-intended, may not only fail to propel economic growth but could also deepen financial inequalities and inhibit long-term fiscal health.

Analysing the Burden of some New Taxes in Ghana’s Fiscal Policies 2017-2023

E-Levy

E-Levy: The government has introduced a 1% Electronic Transaction Levy on digital transactions, such as mobile money and e-commerce, aimed at increasing revenue but adding financial strain to consumers and businesses in the digital economy.
Emissions Levy: A new Emissions Levy targets greenhouse gas emissions, intended to promote eco-friendly practices but mainly increasing operational costs for owners of larger engine vehicles, affecting transportation and logistics expenses.
10% Tax on Winnings: The Ghana Revenue Authority has implemented a 10% withholding tax on betting and lottery winnings, automatically deducted at payout, which diminishes disposable income and impacts leisure spending.
3% VAT Flat Rate: A 3% VAT flat rate is now imposed on VAT-registered retailers with turnovers between GH₵200,000 and GH₵500,000, simplifying tax processes but increasing overall tax burden with an integrated 4% charge including a COVID-19 Health Recovery Levy.
Incremental VAT Increases: The government has increased the VAT rate by 5% by converting existing levies into straightforward taxes and adding a 1% COVID-19 health recovery levy to the existing 3% VAT flat rate, with NHIL also increased to 3.5%, significantly raising tax obligations and affecting living and business costs across Ghana.

Sector-Specific Levies and Taxes

Luxury Vehicle Tax: This new annual levy on high-capacity engine vehicles, collected at vehicle registration and renewal, further burdens vehicle owners.
Communication Service Tax (CST): Increased by 50%, this tax on communication services adds a substantial cost to consumers and businesses, impacting monthly budgets and operational costs.
Financial Sector Clean-Up Recovery Levy: At a rate of 5%, this levy aims to address sectoral challenges but at the expense of the financial institutions and their customers.
Energy and Fuel Levies: New and increased levies on diesel, petrol, and LPG, including a 20 pesewas Energy Sector Recovery Levy, a 10 pesewas Sanitation Levy, and substantial hikes in other associated fees, significantly raise the cost of energy, affecting every sector of the economy.

These tax measures, estimated to generate over 35 billion annually, while potentially lucrative for government coffers, considerably exacerbate the financial strain on both businesses and households. The cumulative effect of these taxes reduces economic vitality, discourages investment, and places a heavy burden on the populace, risking broader economic repercussions.

Negative Implications on Businesses and Households

ECONOMIC STRAIN ON HOUSEHOLDS

Reduced Disposable Income

The imposition of higher Value-Added Tax (VAT), excise duties, and personal income taxes significantly reduces the disposable income of households. As taxes take a larger portion of individuals’ earnings and consumer spending on goods becomes more expensive due to heightened VAT rates, families are left with less money to spend on essentials and discretionary items. This reduction in disposable income not only affects their standard of living but also limits their ability to save or invest, further impacting their financial security and future economic prospects.

Inflationary Pressures

The introduction of higher taxes on products and services often leads to increased production costs for businesses. These businesses, in turn, tend to pass on these added costs to consumers in the form of higher prices, a phenomenon known as cost-push inflation. As prices rise, the purchasing power of the currency diminishes, making it more difficult for households to afford the same standard of goods and services. This inflationary pressure is compounded when fuel and energy sectors are also taxed heavily, as these costs ripple across all sectors of the economy, leading to a general rise in price levels.

Amplified Economic Vulnerability

The cumulative effect of reduced disposable income and rising inflation is a heightened economic vulnerability among the populace. Households may find it increasingly difficult to cope with unexpected expenses or economic downturns, as their financial buffers shrink. Lower-income families are particularly hard-hit, as they spend a larger proportion of their income on consumption, and tax increases on basic goods and services disproportionately affect them. This vulnerability can lead to a reduction in overall economic resilience, making recovery from economic shocks slower and more painful.

Long-Term Socioeconomic Impacts

The long-term impacts of these fiscal policies can extend beyond immediate financial distress. For instance, reduced household spending can affect children’s access to education and health care, leading to broader societal implications in terms of decreased educational attainment and poorer health outcomes. Additionally, the stress and strain of financial pressures can exacerbate social issues such as crime and decrease overall community well-being.

BUSINESS CHALLENGES

Increased Operating Costs

Elevated corporate taxes and sector-specific levies significantly raise the cost of doing business in Ghana. For instance, the increases in corporate tax rates, alongside specific levies on sectors like financial services and energy, directly inflate the operational expenses of companies. These additional costs may need to be absorbed by the businesses themselves if passing them onto consumers would make their products or services uncompetitive. This absorption erodes profit margins, discouraging reinvestment in business growth and innovation. Moreover, smaller businesses and startups, which are generally more sensitive to cost fluctuations, may struggle to sustain operations under this tax burden, potentially leading to business closures and a reduction in overall market competitiveness.

Reduced Investment

The landscape of frequent and unpredictable tax increases creates an environment of fiscal uncertainty that is particularly unattractive to investors. Both domestic and foreign investors seek stability and predictability in the fiscal policies of their investment destinations. When new taxes are introduced or existing ones are increased regularly, it signals potential volatility, making Ghana a less attractive destination for investment. This hesitancy can be particularly detrimental in sectors that require substantial upfront capital, such as manufacturing and large-scale agriculture. Without investment, these sectors cannot modernize or expand, stunting the broader economic development and innovation potential of the country.

Impact on Business Expansion and Job Creation

With higher operational costs and reduced investment, businesses are also less likely to expand or increase their workforce. This stifling of growth not only limits the economic prospects of the businesses themselves but also restricts job creation, which is crucial for national employment rates and economic stability. The lack of new jobs further perpetuates a cycle of economic stagnation, where fewer people are employed and spending power remains low, thereby dampening demand for goods and services and inhibiting economic recovery and growth.

Deterioration of Global Competitiveness

On a global scale, countries competing for international investments offer more favorable tax regimes and incentives to attract businesses. Ghana’s increasing tax burden may render it less competitive compared to these nations. This disadvantage can lead to a diversion of foreign direct investment to more tax-friendly countries, depriving Ghana of essential capital that could aid in infrastructure development, technology transfer, and skills enhancement.

BROADER ECONOMIC CONSEQUENCES

Stifled Economic Growth

High taxation fundamentally alters the economic behaviour of both consumers and businesses, leading to reduced consumption and investment, which are pivotal drivers of economic growth. When taxes consume a larger share of personal and corporate income, less money is available for spending and investing. This reduction in consumption directly affects businesses that rely on consumer demand to generate sales and profits. Similarly, when businesses face high tax rates, they are less likely to reinvest their earnings into expansion and operational improvements, which in turn stifles innovation and productivity enhancements.

The decrease in investment is particularly damaging because it not only affects the current economic conditions but also has long-term repercussions on the economic potential of the country. Investments in capital goods, technology, and human resources are crucial for productivity improvements and competitive advantage on the global stage. Without these investments, the economy may face a slowdown in technological adoption, decreased labour productivity, and ultimately, a lower growth trajectory.

Risk of Capital Flight

The imposition of high and unpredictable taxes creates a significant risk of capital flight, where both businesses and high-net-worth individuals transfer their assets to countries with more favourable tax regimes. This movement is facilitated by the global nature of finance and investment, where individuals and companies can relatively easily move capital across borders. The loss of capital to other nations means that fewer resources are available for domestic investment in critical sectors such as infrastructure, technology, and education.

Capital flight not only results in a direct loss of financial resources but also diminishes future revenue collection, further exacerbating the fiscal challenges faced by the government. The departure of high-net-worth individuals and profitable businesses also leads to a reduction in potential job opportunities, philanthropic contributions, and the overall economic dynamism that these entities bring to the domestic economy.

Erosion of Tax Base

As the economic environment becomes more constrained and businesses either fold or relocate to evade high taxes, the tax base—that is, the total amount of assets and income that the government can tax—begins to erode. This erosion presents a paradoxical situation where high tax rates might actually lead to lower tax revenues over time. Such a scenario forces the government to increase tax rates further or create new taxes to meet its revenue targets, which can perpetuate the cycle of economic decline.

Decreased International Competitiveness

On an international scale, the country’s attractiveness as an investment destination is compromised by high taxation. This situation is detrimental not just in terms of losing out on foreign direct investments but also in reduced competitiveness of domestic businesses on the global market. As foreign investors and businesses choose more tax-friendly countries, domestic industries may lose out on the benefits of global business practices, innovations, and technologies that could otherwise help stimulate domestic economic growth and development.

Conclusion

While the government’s aim to close the revenue gap and meet fiscal targets is understandable, the strategy of excessive taxation might be counterproductive. Rather than fostering growth, the multiplicity and magnitude of taxes could hinder economic vitality, diminish public trust, and exacerbate the challenges faced by businesses and households in Ghana.

The government might need to consider more sustainable fiscal policies that promote growth and expand the tax base naturally without imposing undue burdens on the existing taxpayers. This approach would likely be more effective in achieving long-term economic stability and development.