The Moorish Wanderer

Policy Proposals on Taxation

Posted in Flash News, Moroccan Politics & Economics, Morocco, Read & Heard, Tiny bit of Politics by Zouhair ABH on January 29, 2011

For some time I had to endure caustic comments -on virtual and real life- on how my speech can be bombastic, or indeed hollow at best. No policy proposals. No real, practical, measurable policies to back up the claims.

Constitutional Reforms? Sure, what’s next? There’s a Moroccan, left-wing radical government in charge. why not? What are the policies they are putting forward?” It has been my sorrow to read through, when available, every possible program manifesto on the whole political spectrum in Morocco (including the almighty one) and cannot find correct, policy-oriented programs. It’s either broad, stated principles, or insubstantial, eccentric numbers, or indeed  big policies, but free of concrete implications, presented to a gullible Moroccan public, McKinsey style.

I, small voice trying to be a good citizen -if that’s ever possible in a monarchy like Morocco- would like to talk real policies. Data out there is sometimes difficult to get, to extract and then trying to make sense out of it. But still, I hope it’s worth it and elicit some answers. Now, from a left-wing radical point of view, there are some policies that are hard to phase out and look for new things to consider. Taxation is one among others.

Government now takes away 11% of GDP. Is it a good or bad sign?

In Europe and in the US, where political organization had acquired a level of sophistication that would benefit to Moroccan democracy, liberals and radicals (not so much the radicals, save perhaps for political organizations such as Die Linke in Germany) are systematically labelled: ‘tax and spend‘. Do I sound suspiciously New-Labouresque? In a Western setting, perhaps. But in Morocco, that tax thing is yet to be addressed.

Morocco has an abnormal record in taxation policy: for the last decade, the inland revenue was a locked-in department, privy only to the King and quite autonomous from the Finance Minister (until very recently, a former Royal classmate was in charge of de facto most powerful administration within the Moroccan civil service, far more than the Interior Ministry) and its policy was blatantly ineffective: high levels of taxes, and yet poor return with respect to GDP growth. A legislation obsessive with minutia, and yet loopholes that made fortunes for those smart enough to exploit them.

It is public knowledge that the public finances rely heavily on taxes. Indirect taxes usually, like VAT. And it is also a consensus among economists that VAT is an ‘unfair’ tax. Perhaps I should clarify things up: the VAT tax is unfair because it is not discriminatory towards higher-valuation individuals. In plain terms, the tax is relatively higher on someone earning less than MAD 84.000 than the top 5% earners. The effect bifurcates into a consumption effect and an income effect. HCP figures do show that poorer households have a higher propensity to consumption, and so, the total VAT levy on these populations is much higher. Let us deal with a numerical example: assume individual A, earns MAD 4.000 a month, and buys a product with a 20% VAT. Individual B, earns MAD 40.000 and buys the same product. Individual A has a consumption propensity of 70% and B, 40%. The result is, VAT  extraction on A is 14%, but on B, it’s 8%. This simple example conveys the idea that VAT is fundamentally unfair on low earner. It is a punitive tax on individuals that consume not because they are spendthrift, but because their low income compels them to consume it all, or a substantial part of it. There’s even evidence buttressing the claim that poorer individuals actually subsidize richer ones (mainly because of the consumer surplus differential).

Let us have a look at the Income Tax: it is quite astonishing to record the low contribution direct taxes yield for the budget: and from all the measures introduced -such as tax cuts, tax re-definition, dispensations and so one- the net contribution of income tax remained the same, and increased in absolute terms. While direct taxes represented 30% of total resources, income tax benefit amounted to MAD 29Bn. that is 12% of total resources. Even though that represented an annual increase of 5.04% compared to 2008, this growth was dwarfed by increases in customs taxes (8.45%) and VAT (17.45%). Let us consider the regulations as specified by the Code Général des Impôts on tax rates:

Exempted Income……………………………….. lower than MAD 30.000
10% For Income………………………… Between MAD 30.001 & 50.000
20% For Income……………………………………..MAD 50.001 & 60.000
30% For Income……………………………………..MAD 60.001 & 80.000
34% For Income……………………………………MAD 80.001 & 180.000
38% For Income…………………………………..MAD 180.000 and above

Less than 3 million Moroccans pay less additional income tax than 26 million of their fellow citizen.

The first thing to notice is that the applied grid for income tax is regressive: the higher the income one earns, the lower the marginal rate: The 10% most affluent actually benefit from a negative marginal tax rate (about 3%) while the remaining 80% are charged on average a marginal rate of 3%. If it wasn’t for their numbers or their respective income, it would seem as though the middle ‘class’ (those earning less than MAD 70.000 per annum) actually subsidize, in effect, a tax cut for the 10% wealthy at about 72% (population weighted).

As a matter of principle, I would advocate the levy of a wealth tax. Nothing new of course, but in Morocco, it is a breakthrough. It’s also worth mentioning that in the 2007 general elections, only one political party proposed that (and still stand by it, to my recollection). Now, for anyone trying to start some criticism, I should say that the wealth tax enables the government to prepare for tax cuts to the benefit of hard-working middle and lower classes, or to finance some public projects. Not necessarily highways or dams and certainly not to buy up cheap support from the unions by increasing civil service payroll, but by building more schools and hospitals, by promoting scientific research. And there can be found enough resources to pay for a progressive unemployment benefits scheme, or benefits for the most vulnerable categories of our society: elderly unable to live. The tax cuts promised for 2009 and 2010 benefited mainly to real-estate, in an attempt to help household to accede to property. However, experience shows that in rent-style profit yielding sectors, these tax cuts benefit to established institutions, and not the individuals.

The following is going to require a bit of extrapolation, because of the lack of information I have. Basically, it is going to match the national income distribution with the current tax grid. The idea is to prove that a wealth tax, even with low marginal rates, would yield incommensurable revenues that would largely offset any hypothetical tax cuts for middle earners.

Let us assume for the moment that there’s an extra 40% wealth tax on the 5% -or less- wealthiest in Morocco. Because information is scarce and secretive, the mere assumption of linearity -a very, very conservative estimate- yields a base tax of a little less than MAD 134 bn. A flat levy of 40% on earned billions can yield as high as 52 billion additional revenues. And the good news is, when the inland revenue will collect these taxes, they would look at financial statements of very few people. Under conditions I would briefly discuss later on, it is quite feasible. The argument following which a wealth tax would have a deterrent effect on work or investment are wrong: sectors where multimillionaires prosper are all part of the rent economy: real-estate, mass distribution, agri-business. And it is also worth mentioning that most of them own companies, and it is notorious that MASI and MADEX companies yield considerable levels of dividends. The worst case scenario would be that these individuals would prefer to put their money in their companies rather than cash it, which is the best expected result: non-cashable dividends are better used when intangible assets are created or purchased, with all the benefits on job creation and economic growth.

Income distribution is one of the main justifications for Wealth taxes.

A windfall revenue of 52 Billion would also help decrease the tax rates on the middle and lower classes for about 20% and still leave MAD 26 Bn to spend on projects or further tax cuts, again under some conditions, the most important being the abolition of the opaque computations of deductibles. Alternatively,  it can fund for the long and medium term debt, wipe out the current deficit, or even double the public investment expenses.

Another breakthrough in tax income would be to abolish altogether administrative requirements, red tape as it were -which is a smokescreen justification for large numbers of civil servants-. It would be good for the administration and the taxpayers to introduce tax credit. There are indeed trust issues, but it has the benefit of outsourcing some computations out from the civil service -thus giving room to reduce the number of tax inspectors- and encourage tax payers to have a closer look at their taxes. Tax credits can even be used to help them deduct donations -a benevolent loophole for multimillionaires to avoid paying wealth tax- and help even further young starters, vulnerable households and benefit to the few taxpayers on the tax rate borders to make up for the marginal loss on their earnings.

Next piece on taxation will try and address the issue of VAT in-depth.

9 Responses

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  1. fawzi said, on January 29, 2011 at 10:35

    I, for one, refuse to give a penny to finance the lavish lifestyle of a head of state nobody voted for.

    On closer look, so does almost half of the population…

    • The Moorish Wanderer said, on January 29, 2011 at 10:58

      Well, I did not mention specifically the civil list here. I was talking about wealth tax: would you support it?

      • fawzi said, on January 29, 2011 at 13:00

        No I would not. You want to take money from the wealthy that will end up maintaining the vie de chateau of the uber-wealthy (the king and friends).

        • The Moorish Wanderer said, on January 29, 2011 at 13:09

          I think you’re a bit lost here: I would like to write something on how the budget is spent, but now it’s a matter of taxation, not expenditure…
          I’m asking the question again: do you support the wealth tax as a principle of fair redistribution? Come one, you know you do…😉

          • fawzi said, on January 29, 2011 at 17:59

            I don’t see the point in debating taxation when much of the talk about representation is a “red line”.

            When we’ll start moving away from an authoritarian quasi-feudal regime, we may quibble over taxes.

            • The Moorish Wanderer said, on January 30, 2011 at 12:48

              Do you want me to clarify my position on the civil list? here it is: I don’t think taxpayer money should be used to pay the Head Of State-retinue. I believe He is entitled to a salary like a civil servant, but that’s it.
              Did you read the whole post through? Do you even understand my approach here? It is obvious we need to move away from feudal monarchy to a genuine constitutional set-up. But then, what next? Shouldn’t proponents of such position strengthen it by discussing policies for the aftermath?

              Thanks !

  2. Kaysee said, on February 16, 2011 at 01:02

    Do not agree on the definition of rent businesses. A rent business is a business where there is no investment, no risk and a fixed rate of return.
    Construction, Mass distribution and agribusiness are not rent businesses because (i) there is a deficit in housing, infrastructure and public transportation requiring investment in capital (ii) Mass distribution is a growth sector, only 10pc of the population buys at mass market stores, the rest is in cornerstores and souks which have leaner business models and (iii) agricultural sector is under-industrialized and has to sustain massive investments in the following years (cf. plan maroc vert).
    Speaking of rent industries, you have utilities, banking, insurance and telecoms, but these sectors will still incurr investments in fixed assets that carry investment risk… So i am not so sure about those either.
    Even that, you can regulate monopolies and rent industries as they have done in Europe and the US with regulating utilities and the energy sector. The four sectors i have mentioned in the former paragraph are regulated in Morocco/ To which extent? Is it efficient regulation? Does this regulation profit to the customer? Open question to be discussed.
    Corruption is on the other side THE real rent economy that we need to get rid of. Non-economic projects that do not yield economic output as well need to be shelved (TGV, Nador West Med, some mass tourism investment…). That is because these investments follow political agendas that won’t be efficient in a free market.

    • The Moorish Wanderer said, on February 16, 2011 at 08:56

      Hello

      I take your point on agribusiness. when you look at it closely, rent sectors are those with abnormal levels of profits over a long time period. Whatever competition between Centrale Laitiere and Copag, CL still holds high levels of profits, all of which is mainly distributed in dividends. That’s the kind of business I was referring to. Plus we have a mess in terms of agricultural economics that Plan Maroc Vert is likely to worsen, experts say so, I merely relay such claims.

      Ok for real estate. There’s a need for housing facilities. But for the time being, households are turkeys. Property developers, building societies are the ones getting all the money, with levels of profits so high REGARDLESS of the level of interest rates. Doesn’t it strike you as odd that a happy few would benefit from that? And what word can better qualify than ‘rent’ in this case?

      ONA-SNI ‘investments’ are not extensive, i.e. they do not result in an expanding production/productivity. and over 6 years, their intangible assets move little if not at all. And yes, my analysis is not straightforward because reality seldom is. The link is ok, Just click on ‘Emetteur’ drop-down box and download ONA’s financial statements. I was keen on making up a graph, but the time series is too short.

      thanks for stopping by !

  3. […] populations, and thus apply the optimal rate of consumption tax and tax breaks. Just like the proposal on introducing wealth tax, the purpose is to rebalance contributions commensurate to each individual’s […]


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