Tax mix in Africa
Modern states typically levy a mix of taxes, including personal and corporate income taxes, broad-based consumption taxes, excise taxes on specific goods or services, payroll taxes, property or wealth taxes, wealth transfer taxes, as well as user fees and benefit taxes. The notion of tax mix refers to the balance of different taxes that make up the tax revenue of a country. Beyond the most obvious purpose of raising revenue to finance public expenditure, taxation is often used to regulate social and economic behaviour and as a tool to shape the distribution of economic resources. The tax mix is a telling indicator of the particular purpose for which a tax is imposed as well as its welfare effects, i.e. the costs it imposes on consumers, workers and capital owners.
For reference, OECD countries typically tend to rely on a relatively balanced tax mix. It is economically more efficient to do so because the welfare cost of collecting any type of tax increases with the collected amount. First, large contributors to a tax are easy to identify while smaller contributors are typically less profitable to track. Second, taxes generate tax avoidance behaviour which has a cost. Third, political resistance and the administrative costs of collection rise with the amount that is collected. However, it should be noted that average collection costs for a new tax may actually go down before they go up, as there are fixed costs for setting-up administrative capacity (staff, IT systems, etc).
Figure 7 bar-charts the distribution of the tax mix in 2007 as a percentage of total tax revenues in African countries. It illustrates that there are large differences in the tax mix patterns in Africa. A country like South Africa obtains most of its tax revenues from direct taxation, while countries like Senegal and Uganda rely mostly on indirect taxation. Kenya and Mauritania show a relatively balanced mix of different types of taxes. So does South Africa if the importance of personal income taxes within direct taxes is taken into account. Other countries, however, like Algeria, Angola, Equatorial Guinea, Libya and Nigeria almost entirely rely on one single type of tax.
Figure 8 shows the evolution of the tax mix since 1996 with each type of tax averaged across African countries, weighted by the size of the economy, and measured by collected revenues as a share of GDP. Taxes are classified into four categories: direct taxes (mainly personal and corporate income taxes), indirect taxes (VAT, sales taxes, excises etc), trade taxes (customs duty mainly) and resource-related tax revenues. Governments also collect non-tax revenues such as stamp duties. The relative importance of trade taxes in the tax mix has been declining in Africa since the mid-1990s. Direct taxes have been moderately increasing and indirect taxes have stagnated. The bulk of the increase in tax revenues is due to a spectacular increase in taxes on resource extraction. These taxes have nearly tripled as a share of domestic income over the past decade. The decline of commodity prices in the second half of 2008 coincided with an interruption of this trend – indicating that revenues from this source depend to a large extent on commodity prices and are vulnerable to price volatility.
In Figure 9, countries are classified according to whether they are oil producers or not. This classification explains the evolution of the average tax mix in Africa. On one side, oil producing countries levy a large and increasing percentage of revenues on resource extraction. Other types of taxes have stagnated in these countries in terms of their relative importance compared to the overall size of the economy as measured by the GDP. On the other side, non-oil producers have made more modest overall progress in raising the tax ratio and had to rely on other forms of taxation. In these countries, it is the more politically demanding types of taxes – personal and corporate income taxes together with VAT – that have been driving the slow and laborious increase in tax shares. In other words, although oil producers collect more tax revenue, non-oil producers actually have higher quality tax revenues.
The period of analysis covers a commodity boom and the entrance of new oil-producing countries into the market. Figure 10 provides two examples. Chad began oil extraction in 2003. The country experienced a huge increase in resource-related tax revenues in the period that followed. Other types of taxes stagnated at best following oil extraction. The surge in oil prices also gave hydrocarbon producers higher tax revenues. For example, in Libya the percentage of resource-related tax revenues rose from 20% of domestic income in 1999 to nearly 70% in 2007. In Libya too, other types of taxes stagnated at best following the oil price boom.
Resource-rich countries, including those who have recently discovered oil or minerals, have a tendency to substitute resource-related tax revenues for other taxes, direct, indirect or from trade. This is the case for Algeria, Angola, Botswana, Congo, Chad, Equatorial Guinea, Gabon, Libya and Nigeria.