You do not need to be a noble prize winning economist to know that countries with low tax regimes tend to have higher economic growth. And conversely countries with high tax regimes have the lowest economic growth rates.
Ireland and the United Arab Emirates (UAE) are good examples of countries that have attracted investment and consequently strong economic growth, in the recent past, riding on low taxes. This is what Donald Trump has been doing in America to take jobs back to that country.
Tax is a cost to business. Consequently when business taxes go up, companies simply transmit this increment to their customers by increasing the prices of their goods and services. Companies may also scale down on production which impacts negatively on economic growth. And bad economy means high cost of living, fewer jobs, fewer business opportunities and eventually higher taxes. It’s a vicious cycle.
With this backdrop, it’s surprising to hear people say Hakainde Hichilema is fighting against the people when he speaks against high mining taxes. By interpretation, what Hichilema’s opponents are saying is that high mining taxes are for the benefit of the ordinary man and woman on the street. But how do high taxes benefit the ordinary person in Chibolya or na Bwalya? It’s inconceivable. It just doesn’t make sense, not in economics, not in mathematics, not in any field.
Let me explain further using the increased mineral royalties which are the hot topic of the moment.
Unlike companies producing consumer goods and services, a mining company is unable to transmit tax increases to its customers because the price of it’s product is controlled by international markets. So the mining company is stuck with the incremental tax.
Consequently business sense dictates that, to survive, the mining company must now carry out a number of internal adjustments to maintain its operations. This may include cutting jobs, freezing salaries and reducing or even doing away with expansion projects.
Already some mining companies have indicated that whereas they may not cut jobs immediately, they will definitely halt expansion projects. Even the commitment to hold job cuts appears to be subject to ‘continued discussions with govt’. In short the mining companies are still expecting ‘something’ from govt for them not to cut jobs.
Mining companies generate 80% of Zambia’s foreign exchange earnings. Expansion programs are the life blood of any mine. These projects ensure that as older mining sites come to an end, newer ones come on stream. In this manner, the life of the mine is sustained. So a cut in a mine’s projects impacts on the mine’s productive capacity and, in the longer run, the very life of the mine. And for the country this poses a huge risk to its foreign exchange earning capacity.
The immediate impact is to the ordinary men and women who work for the mines who may see a freeze in their salaries and other fringe benefits. Similarly the mine would have to reduce the goods and services it procures from other companies (including SMEs) to align with its new production levels. Similarly the company may scale down on its community responsibility programs such scholarships, local women empowerment, community infrastructure, etc.
In the long run govt’s capacity to collect tax starts to go down. Whereas in the short term govt could collect more taxes from the higher rates, in the long run tax collections go down due to low volumes of economic output. And as tax collections go down, the first sector to suffer is the social sector. Consequently it’s absurd to try and attach patriotism to the argument for higher taxes. What is patriotic about high taxes?
Higher taxes mean more expensive goods and services, it also means lower salaries and fewer jobs. Which means more higher taxes. Which means fewer social services and investment in public goods. It’s a vicious cycle like I keep saying.
Let us go back to the topic at hand, the increased mining taxes specifically mineral royalties. To argue that the increased mineral royalties is collecting ‘a fair share’ for the Zambian people gives an impression that the monies so collected will immediately go to the benefit of the poor people of Zambia. But this is not always true. Especially not in our immediate situation.
You see, the main reason that our govt is increasing taxes is to service the huge debt that has been contracted in the past few years. And what change remains would go to running the civil service and struggling parastatals. Just last year govt spent almost $1 billion on debt servicing (interest only). And in her budget speech minister of finance Margaret Mwanakatwe admitted that the budget deficit for 2018 would reach 7.4% against the targeted 6.1% mostly due to debt servicing.
Remember, it’s not only mining taxes that have gone up but govt also introduced new taxes on individuals such as Whatsapp tax, borehole tax, tollgate fees and rental tax (enforcement) just in the last two years. In fact HH has been talking about the general high tax environment which includes these taxes on individuals. But his opponents have chosen to highlight his views on mining taxes only to serve their own interests.
If not well managed mining taxes can render our country uncompetitive in the race for mining investment dollars. Zambia is not the only country with copper. Many other countries have the commodity. It may be an issue of the grade, mining technology required and sovereign risks. But tax is definitely the number one sweetener. Copper production in this country has been on the upswing post ZCCM. But will it continue going up or will it dwindle? The answer to that question lays with govt.
In conclusion, we are sacrificing economic growth, job creation and lower cost of living to pay our debts. Money we have already consumed with very little to show for. We are sacrificing the hope of an economic revival on the Copperbelt. We are sacrificing the promise of North Western province turning into the new Copperbelt. We are taking away the chance of Luapula province seeing one or two fully fledged mining operations.
We are like Esau, in the Bible, who sold his birthright for a bowl of soup.
But this is what it boils down to; we can’t have both of high taxes and high economic growth at once. We must choose one. But in our case we have no option but to go with higher taxes because of our debt situation. And, unfortunately, it’s the poor person who must bear the brunt of fewer jobs, high cost of living and eventually higher taxes again.
It’s vicious cycle.