Policy Proposals on Taxation, Part.2
As it is, the bulk of government receipts is made of indirect taxes, like the VAT. And on the other hand, the subsidy expenses (that might amount to MAD 21 billion) are growing rapidly, and they too, represent a sizeable chunk of government expenses. It does look like the government is taking away with one hand (the right one) what it has just given with the other (the left one, obviously).
Such accounting flaws are not necessarily wasteful; however, it does amount to a transfer subsidy from the less well-off to the richest. This is due to the fact that VAT and subsidy are respectively ‘egalitarian’ taxes and expenses, but when compared to their income, it is clear it benefits mainly to the well-off.
The numbers I lay before the readers are roughly patched up, and that is mainly, if not solely, due to a lack of data: I have to reconcile data circa 2001 on consumption propensity, with Gross National Income data and Budget law circa 2009. To do so, there remains a strong assumption about stable consumption patter, which can be seen from the graph.Let us consider two types of consumers in Morocco: the lower 10% bracket, with a an average annual income of MAD 48,067.33, has a annual overall consumption of MAD 21,790 roughly 45.3% of immediate income. The upper 10% bracket, on the other hand, has an average annual income of MAD 817,144.7 (that’s about 3 Million Moroccans, with large discrepancies within this population) with an annual consumption of MAD 266,150 i.e. 32.5% of income.
Even though one might argue that richer households do not buy cheaper good (They might buy their bread from Paul bakery than the nearest l’picri) but when numbers are crunched together, the discrepancies in terms of consumption pattern differ very little. Furthermore, 2001 HCP survey of household pattern of consumption shows that food consumption is the main discriminating factor: “ni le sexe du chef de ménage ni son état matrimonial ne pourraient constituer des facteurs de différenciation quant à la part des dépenses consacrées aux dépenses alimentaires puisque ces coefficients restent, toutes modalités confondues, au voisinage de la moyenne nationale.” […] “Les dépenses d’habitation et d’énergie constituent la seconde composante du budget du ménage. Le coefficient budgétaire de ce poste n’a pas sensiblement changé en passant de 20,1% en 1985 à 21,4% en 1998 pour se situer à 22,1% en 2001.” In fact, if anything, bread and crop consumption is mainly in favour of the better off: […] Par ailleurs, la dépense [de consommation de pain] qui lui est réservée augmente en valeur avec le niveau de vie : les 20% les plus favorisés dépensent en pain acheté 11 fois plus que les 20% les moins favorisés […]au niveau national, les 20% les plus aisés réalisent une dépense par tête en pâtes alimentaires équivalents à quatre fois et demi celle des 20% les moins aisés” and these are the very products targeted for subsidy, alongside other strategic products like flour, sugar, whose consumption is either at par, or more stressed in the 10 to 20% well-off.
In addition, VAT receipts do also target blindly the less well-off, and quite effectively, all households pay indifferently between 7% and 14% of their food consumption. According to the 2009 budget, VAT and other indirect taxes receipts amounted to MAD 62.6 Billion, which exacts some 8.7% of GNI. More precisely, net VAT receipts amount to MAD 26.4 Billion, (with 94% VAT imports) this, however, is more or less squandered in subsidies, as indeed the total amount for subsidies was about 26 Billion in 2009. It does show that, not only this policy has a neutral fiscal effect on the budget, but it actual transfers purchasing power from poor to rich households.
Can we therefore seriously discuss a subsidy lift? For the time being, it is rather a risky move, and the effects would be worse on Moroccan households. Without much details, it has to do with the relatively low productivity per worker (that partly explains why an increase in commodity prices cannot be offset with high productivity) or indeed a very low rate of effective productivity (in real terms, productivity only doubled over 50 years)
On the other hand, there is a way to allocate VAT and subsidies alike so as to support the less fortunate of Moroccan citizens. Though the proposed policy is complex (and to that matter, with no particular proven record of success). Basically, the idea is to use the income tax brackets as determinants for a consumption tax or tax credit. Since the data at hand is very crude, We shall stand by the use of averages (not to be confused with mean-testing) but if more detailed datasets were available, advanced statistical models could be of great use to determine the best way to partition household 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 wealth.
We shall us the decile partition to allocate progressive rates, so as to reduce the burden on the 10 to 20% less well-off. Under the assumption that consumption tax follows closely income distribution, not only the effective impact of taxation on the 10% less well-off will be reduced from 8.7% tp 3.2%, but it actually allows to double the VAT receipts to MAD 42.93 Billion (in case of more sophisticated statistical methods, the windfall income would be lower, but certainly larger than the initial 26 Billion receipts). The result is not only fiscally positive, but on the whole, it does not hurt overall consumption very much (save perhaps for the richest households, but their proven low marginal propensity of consumption can offset their -supposed- loss of purchasing power) and in fact provides additional revenues to sustain the Caisse de Compensation -and thus gives time to devise a new policy in targeting vulnerable populations.
On the other hand, there is also the need to introduce tax breaks (and for the 5% worse-off, a food-stamps program) for the ‘squeezed middle’, i.e. those aspiring middle classes, or those on the marginal borders of taxation that wouldn’t benefit from these measures. These households remain relatively in low numbers (no more than 1.66 million individuals, about 500.000 households, when considering the lower brackets) and any total or partial tax breaks would cost less than MAD 2 Billion. Obviously, because level of detailed figures stops at the decile level, I could not delineate precise measures for these population, but the crude figures do show a marginal cost for these tax breaks.
At the end of the day, one can conclude that, given appropriate steps and a strong political will for the policy, it is not only possible to purely suppress VAT (and, over the long run, reform the CdC) and introduce a progressive taxation system that would preserve the purchasing power of the lower classes, while not endangering public finances; Far from it, the policy brings money that could be used for productive schemes.