# The Moorish Wanderer

## Middle Class Tax Burden

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on December 6, 2012

Listening to the Head of Government from time to time is entertaining and instructive at once. Whether one likes him and his politics or not, this is representative democracy at work. But overall he started to make use of statistics to get his points across, which is a marked improvement in his argument, and he is better for it. But he is still light on policy-making however.

There is this specific claim about the middle classes, and his failure to address it -or should I say, the failure of opposition caucuses to confront him on the issue- the tax hike on higher income was a sensible move, but it was not matched with an equivalent tax cut for these middle classes. Which leads me to beg the question: was this government policy to achieve some level of fiscal equity, or was it just a move to increase fiscal receipts? These are the questions I would have liked members of parliament to ask the Head of Government.

I argue here the present tax system, with or without the tax hikes on the top income-earners, is structurally unfair to everyone with an annual income below 300.000 dirhams, and specifically to the middle class (middle class as defined mathematically to be the median income per household in a defined income distribution)

First, I use both Exponential and Log-Normal distributions to prove a couple of nice (and useful) properties; I referred earlier on to the exponential distribution as a possible way to model household income distribution. Yet it misses a particular aspect crucial to policy-making: though inter-decile ratios are not constant over time, they can be proven to be centred around the asymptotic value (notably the $\ln(2)$ between the mathematical expectation and median) but there is little in the exponential distribution for the policy-maker to exercise their social preferences.

Log Normal vs Exponential sample distributions. The Log-normal allows for ‘more’ high income households.

The Log-normal distribution is not that different, but it has the advantage (and from a computational point of view, an additional difficulty) of fielding two parameters in its probability density function. As indeed one can see in the following densities:

$g(x)=\lambda e^{-\lambda x}$ the exponential, and

$f(x)=\frac{1}{x{\sqrt{2\pi \sigma }}}e^{-\frac{(\ln x - \mu)^2}{2\sigma^2}}$ the log-normal

Both distributions are different in form, but not so much in sample representations. Indeed, the exponential distribution is reputed to be strictly decreasing. But it can be argued households with no income (i.e. with zero or close to zero annual income) need to be taken out of the population, perhaps because they can always rely on transferred income (or because those with no income do not form a household) in any case, the sample population used to generate the exponential distribution of income does not look like it.

second, let us consider a Taylor approximation around the median point of the proposed distribution, that is:

$f(x)=f(me)+(x-me)f'(me)+O(me)$

It computes the marginal income around the median. Marginal income is the key to understand the present taxation system – as it divides up a household income into brackets, each subjected to increasing tax rates. In essence, the derivative around the median gives a fair idea of any additional income for this population (our median class) and how it would be taxed. A ‘fair’ tax structure would minimize the marginal tax burden around the median -namely, the marginal increase in tax rate for these households. In fact, the optimal tax plan would be a flat tax rate for all the median class, because then additional gains around would not be excessively taxed. A numerical example would be that of a household with an annual taxable income of 78,000 dirhams – a relatively small 4% increase (or 3,000 dirhams) is best left taxed at the same rate (or infinitesimally the same) while the present system takes away 940 dirhams from the 3,000 increase. A marginal tax burden of 32% for a 4% increase in income is not exactly fair.

So, the derivative around the median provides a generalized result that can then be compared to the present tax system, and assuming a strictly positive marginal increase in their income, the median household would observe the following result:

$f(x) = \dfrac{\partial(\left | \exp \mu \right |\sigma \sqrt{2\pi})^{-1}}{\partial \exp \mu}=\frac{\dot{\exp \mu}}{(\exp \mu) \sigma\sqrt{2\pi}}$

once this is plugged back into the earlier Taylor series, the net benefit for a median household is such:

$f(x) = \frac{\dot{\exp \mu}}{\sigma\sqrt{2\pi}}\times\frac{(x - \exp \mu)}{\exp \mu}$

And this is a pretty neat result in many aspects: the term $\frac{(x - \exp \mu)}{\exp \mu}$ refers to the gross benefit for a median household gaining a supplement of x dirhams. But this needs to be replaced into the perspective of the whole distribution, so it is ‘discounted’ with the impact on the median itself – that’s $\dot{\exp \mu}$ and then weighted by the measure of inequality (or income dispersion) $\sigma\sqrt{2\pi}$

The impact on the general welfare can then be computed by integrating (i.e. generalizing the individual boost around all median household) around the additional x dirhams to the median:

$\int_{0}^{x}(\frac{\dot{\exp \mu}}{\sigma\sqrt{2\pi}}\times\frac{(u - \exp \mu)}{\exp \mu})\mathrm{d}u$ with an expected welfare gain of $\frac{\dot{\exp \mu}}{\sigma\sqrt{2\pi}}\left(\frac{u^2}{\exp \mu}-u \right)$ which can be verified for u>1 is a net gain (any additional dirham contributes to generate additional welfare, that is).

So there is good evidence that suggests the total income distribution is improved when median income increases. The impact on the average household income is not as high as one would expect (up to a $\sigma^2$ term) but the general welfare of all individuals close enough to the median definitely improves, and those below the median can expect over time to catch up to it. Obviously, a tax rate that does not take this effect into account might indeed stifle the described effect. And this is what we are set out to demonstrate.

My third and last step involves using logged income to emphasise the effect of tax burden on middle class. This means we are back to the useful bell-shaped curve Gauss-Laplace. The log here does not denote of any particular distribution, but indeed could depict the social preferences a policy-maker needs to display in view of the results computed earlier on: since welfare gains are highest for median households, the policy-maker needs to place a larger emphasis upon them – and the Normal distribution serves this purpose pretty well – in mathematical terms, the tangent is almost flat around the median.

Plotting the densities of tax rates and income provides no particular explanation as to the transfer effect, nor the tax burden per income. For instance, there is no particular correlation between income and their theoretical tax brackets, a strange result given the progressive tax structure in place. Additionally, a supposed preference for median income household (captured by a Normal distribution centred around the median income) contradicts the present tax structure: the average tax rate is 27%, whose corresponding income coincides with income between 60,000 and 180,000 annual income. But since there is not such rate, it has to be a convex combination of the 30% and 34% rates, with the 30% rate falling on income between 60,000 and 80,000 – our median class. The convex combination puts the weight on these households at 57%. In fact, those with income between 74,313 and 77,330 dirhams per annum pay 7% more in taxes than the immediate tax bracket (those with income marginally above 80,000 a year) just because of the present tax system. In aggregate terms, this is almost 4 Bn dirhams in deadweight loss due to the present system.

The main problem with the present tax system is its ‘jumping function’ which results in disproportionately larger tax burden for those at the margins. Unfortunately for the middle class, many of them are on the margin, the closer to 80,000 a year, the higher the tax burden. A good example can be provided for the figures mentioned before: incomes of 74,313 and 77,330 dirhams pay respectively 8,293.87 and 9,198.36. And although the difference in income is merely 4%, the richer household will pay 10% more than their immediate neighbour. In fact, this fiscal injustice reaches its peak around the median.

## The Economic Chronicles of the Kingdom, 1955-2011 Part.2

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on July 17, 2012

I should thank Romain Ferrali for his comment/question on some figures I have used on my Capdema presentation (quite a successful gathering, I am told. the Capdema event, obviously) about Morocco’s “1%”.

A challenge indeed, given the scarce information about income distribution from both HCP and the World Bank.

My initial -and strongest- assumption about income distribution is its stability across time: incomes evolve overtime, but the differences between the median and most percentiles relative to their respective incomes are assumed (and tested) to remain constant, or so we shall observe.

A caveat the reader would do well to consider: these incomes are computed on the basis of Gross National Income (from the World Bank Opendata) divided up by the number of households, either provided by HCP census or estimated on the basis of past annual demographic growth. Such a crude method bears several shortcomings in terms of sources of income not accounted for, the heterogeneity of different sources of income, the transfert effects between household to name but three. On the other hand, the primary source of interest remains the dynamics of income distribution, and if indeed additional information arises, I would be glad to carry on and finesse it further. This method might explain why HCP and myself disagree on the definition of “middle classes”: mine is simply the statistical definition of the income halfway between the poor and the rich.

The computations are based essentially on a set of three assumptions:

1/ Income distribution is constant: the same exponential distribution (with different parameter $\lambda$ for each year)

2/ Parameter $\lambda$ i.e. the inverse of GNI per capita, has its own statistical distribution.

3/ the parameter is stationary, possibly with a normal distribution whose mean and variance are estimated on the basis of time series.

An earlier blogpost assumed income distribution was exponential; an educated guess, you might say, given the fact that the decile-based cumulative density function clearly indicates a strong level of inequality – not very scientific indeed, but given the information at hand, it was the best I could come up with. I was lucky enough to find a paper than vindicates partially my assumption.

On income distribution in the United States, Dragulescu & Yakovenko note:

“The exponential Boltzmann-Gibbs distribution naturally applies to the quantities that obey a conservation law, such as energy or money [10]. However, there is no fundamental reason why the sum of incomes (unlike the sum of money) must be conserved. Indeed, income is a term in the time derivative of one’s money balance (the other term is spending). Maybe incomes obey an approximate conservation law, or somehow the distribution of income is simply proportional to the distribution of money, which is exponential [10]. Another explanation involves hierarchy.Groups of people have leaders, which have leaders of a higher order, and so on. The number of people decreases geometrically (exponentially) with the hierarchical level. If individual income increases linearly with the hierarchical level, then the income distribution is exponential.”

The authors provide two possible explanation for that particular distribution: it is either linked to the amount of money at hand, i.e. the higher the income a household earns, the higher its cash-in-hand is going to be, and because money is conserved, income benefits from that effect too. The second explanation is more sociological: income is assumed to have an institutional link to hierarchy, the social and professional status of a particular household confers a certain level of income. Here again, conservation in hierarchical statuses confers on income the same distribution.

The exponential distribution is a very useful statistical device. Its density function needs only one parameter, and is defined such:

$f(x) = \lambda \exp^{-\lambda x}, x>0, \lambda>0$

the restrictions on x is useless in this particular case, since income is obviously a positive amount of money, and lambda is necessarily positive, since:

$\mathbb{E}(x) = \frac{1}{\lambda}$

and there lies the usefulness of the said distribution: all we need is a time series of GNI per Capita or per Household to generate yearly income distribution. The idea is to use these as random vectors to check the effects of inequality over a long period of time. Once this set of distribution is generated, we test the results against empirical data from 1985, 1991, 1999, 2001, 2007 and 2010.  (available on the World Bank data nomenclature) The data at hand is the decile/quantile distribution of concentrated income.

we test whether differences in both values for available years are not statistically significant. Don’t bother with seemingly larger differences for 2007 and 2010, the sample size puts it in perspective.

If the three assumptions turn out to be correct, we should observe generated results close enough to empirical percentages from these years, and thus conclude to the robustness of the estimated income distribution. The policy implications of these results are infinite: fiscal policy, among others, would gain a lot from addressing issues of truth-telling and other institutional dysfunctions. But for now, I am focused on trying to describe as explicitly as possible statistical properties of income households in Morocco since its independence.

A first test to check whether income distribution is exponential, is to compare synthetic and empirical median income per household. The exponential distribution has the following property:

$\int_{0}^{x}\left(\lambda \exp^{-\lambda t}\right)dt= 0.5 = median$

which means the difference (or ratio) between average and median income per household is a constant commensurate to $ln(2)$ the null hypothesis in this case is to check whether observed discrepancies between both datasets are statistically insignificant. At 95% confidence interval, we get most empirical values lay between the 45-52% percentiles, which, given the size of the selected samples, is a pretty robust evidence these differences amount to very little. We therefore retain at high levels of confidence the assumption of the exponential distribution.

For instance, median income in synthetic data for 1985 was 23,293 dirhams, vs empirical median income of 24,210 dirhams, which falls within the 51%-52% percentile (which is more than enough to test at 95% confidence). It is worth pointing out however that these discrepancies, for all their statistical irrelevance, are systematically in favour of empirical data, which points out to an income distribution marginally more unequal than the exponential distribution suggests. However, because the fit is robust enough, we shall settle for the synthetic model. A final caveat perhaps: the test was carried on 6 particular dates, which still does not preclude significantly different results for the 51 remaining years. The likelihood of such event nonetheless is very low in view of the levels of confidence used earlier.

The fact the distribution has been the same (with its parameter $\lambda$ evolving with GNI per household) since 1955 might lead to think that income inequality has remained constant since 1955 (recall the ratio Median/Mean is $\log(2)$) and for some inter-quartile ratios,  results are stationary, which means inter-quartile income inequality has not change significantly over the past half a century.

large discrepancies between the top 1% and the median incomes starting from the 1970s

The picture is not all that clear, though: first off, the upper bound evolves frequently, a properties that has to do with the elusive nature of high income households (the 1% more affluent) the synthetic income distribution. If anything, there seem to be no particular link that growth since 1955 has contributed to influence income inequality one way or the other. What looks to be painfully clear however, is that the richest 1% have enjoyed a distribution of income growth whose trend is undoubtedly in their favour: between 1955 and 2010, the richest 1% have improved their income relative to all percentiles below the median by 6%, even as GNI per Household grew an average 6.91% over the same period of time. It might look like jumping to conclusions, but unequal distribution of income growth seem to contribute a lot, if indeed 86% of it goes to the top 1%.

I would say the graph and these computations understate the discrepancies between top and ‘regular’ earners: the sample size goes only as far as list maximum values of an annual income of 1,077,000 dirhams per annum, even as rarefied incomes are larger by far. If anything, these computations would instead minimize the reality of income inequality, because extreme values on the right hand-side tail are bounded.

So there it is: a quick look at the relationship between growth and inequality indices point to the lack of correlation: growth in Morocco does not necessarily bring about better quality of life to households below the median line. If anything (but the statistics gets blurry there) income inequality abated during the 1990s (a period of recession as well as structural reforms) and increased with the early 2000s (an economic expansion by many measures)

## Pure Income Tax: a Rate for Everyone

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Polfiction, Read & Heard by Zouhair ABH on March 23, 2012

I suspect lawyers got the better of economists when it comes to the proper rates that apply to Income Tax rates. income brackets are determined somewhat arbitrarily -I haven’t come across any MINEFI stating otherwise yet- and all exemptions, tax breaks, loopholes and other regulations are yet to prove their usefulness, both as a policy instrument and as an incentive to influence taxpayers’ behaviour.

As it stands now, Income tax represents 3.8% of total GNI; roughly speaking, that means every household in Morocco pays some 4.440 dirhams in taxes – which is quite absurd, since a lot of these do not pay it actually, and another bunch is getting away with it; while it is understood the poorer 10% do not pay income tax due to their very low average annual income – some 25,172 dirhams, the wealthiest 10% earn an average of 427,931 dirhams per annum. So in effect, the real average tax payment is closer to 3.97% or 5,000 dirhams per household. But even that amount of money is phony; how can one explain the high discrepancy in the 38% marginal rate, the average 3.97% and the real marginal rate of 1.16%?

The is simple: there is an incredible inequality in household income distribution, and the present tax system is intrinsically unfair, as it lays a heavier burden on the middle/median incomes relative to the higher ones, and finally, there are many wealthier individuals with Agricultural Business whose taxes are negative, i.e. subsidized in their income. Indeed, the present tax code presents (urban) taxpayers with the following rates:

<30,000 per annum: ……………exempted
[30,001 ; 50,000] per annum: ………..10%
[50,001 ; 60,000] per annum: ………..20%
[60,001 ; 80,000] per annum: ………..30%
[80,001 ; 180,000] per annum: ………34%
>180,000 per annum: ………………….38%

which does not compute with income distribution, since the actual IR rates tend to hit the middle class harder – and by middle class I mean the 75,500 dirhams these households earn annually, and many of these cannot get away with the various loopholes and breaks the tax code allows for, thus creating an actual tax break for the 38% marginal rate.

Is it possible to provide an alternative tax system then? Sure. It would have the advantage of being simple, progressive and easier to carry out, because rates would adjust themselves automatically. There is one little caveat though: the statistical evidence from income distribution has to be solid and significant. Since I do not have access to the detail, I would venture some results based on the public data HCP released regarding income distribution in 2009.

Let me first start with some doodling with some simple assumptions – just to get my point across. Let’s assume income distribution is normally distributed with the present mean 114,420 dirhams, and (sampled) deviation of 1,474. Computations are therefore easier to run with custom tax rates: depending on how far a household’s income falls from the average 114,420, they have to pay a commensurate tax rate computed with the same normal distribution; since the average income rate households in Morocco below the median threshold are supposed to pay is 7%, then we can match Normal income distribution $N(114,420 ; 1,474)$ with an equivalent Normal income tax distribution $N(7 ; 1)$ in this simple setting, the wealthier 1% with an income of 117,850 dirhams and above would pay at least 9.3% income tax, while the middles classes, those close to the average 114,420 dirhams would pay no more than 6.9%. Under this scheme, and following this income distribution, tax receipts would increase from existing 28.96 Bn dirhams to 46.82 Bn dirhams, with an overall income fiscal pressure of 6.3% of total Gross National Income. and we still get to exempt the poorest 651.600 households from income taxes. The windfall profit from the scheme is essentially motivated by the fact that income and tax distributions have been matched with the same random parameters, hence insuring perfect fairness in taxation, cutting red tape and making sure every individual has a clear understanding of the tax system.

Application: under this scheme, a household earning 111,000 dirhams would have to pay 4.68%  income tax, such:

$w_{t}\pm \alpha_{t}\sigma=114,420$

and thus using the level of confidence to compute the custom income rate:
$t_{p}=7\%\pm\alpha_{t}$

another household earning 117,000 would thus pay a 8.75% income tax rate. Simple, quick and easy to implement. In each case, households with comparative incomes would pay respectively 5,194 and 10,237 dirhams, which is still far below the respective taxes of 20,540 and 22,580 dirhams they would have to pay under the present tax code.

#Income Distribution
#Phase 1: assume Income follows Normal Distribution
#Sample 1/1000 of total number of Households - HCP Census
n<-6516
I_M<-rnorm(n, mean=114420, sd= 1474)
hist(I_M, prob=TRUE)
quantile(I_M, probs = c(0.01,0.99,0.95, 0.25,0.5, 0.1, 0.05))
Tax_Norm<-rnorm(n, mean=0.07, sd=0.01)
quantile(Tax_Norm, probs = c(0.01,0.99,0.95, 0.25,0.5, 0.1, 0.05))


But we do not live in a Gauss-Laplace world; there are such high income inequalities that mean and median household income in Morocco are at a 2:1 ratio, yet another indicator of the disparities. As a matter of fact, I did point out -in a rather hurried manner- that the best estimate for income distribution across Moroccan households is the well-known Pareto distribution. I will try to provide a correct estimator this time, and from then on apply the proposed tax policy instrument;

Cumulative share of decile households (HCP)

How do we know income distribution in Morocco is indeed a Pareto distribution? Well, the first item to look at is the cumulative distribution function built from the published data; the graph gives compelling evidence that indeed income distribution is Pareto – which is not great news since it means high discrepancies in income across households, and subsequently unfair tax brackets embedded in the tax code.

The object of interest here is indeed income share per decile, and the basic idea is to match it up continuously with custom tax rates, hence eliminating tax brackets and all loopholes to the benefits of all: government receipts increase, and a pure tax rate ‘discrimination’ (discrimination in the sense that every individual has only to pay its own, intrinsic tax rate) allows for a lower tax burden compared to the present tax system. Everybody gains from it. Luckily enough, there is little to estimate; what is more, the properties of the Exponential distribution allow for some computations to run smoothly;

since we are considering a 1/1000 sample, the maximum income in this case is 1.18 Million dirhams – the richest household in this sample, so to speak. We check easily that the minimum income earned at the 1% level is 520,600 dirhams, while the median sample is 79,500 dirhams – which in line with the real-life data (75,500 dirhams)

The next batch of computations is pretty straightforward, we need income tax rates to match income distribution with its own Exponential distribution, and so:

#Phase 2: generation Exponential Income distribution
n<-6516
#Sample as previous: 1/1000 of total number of Households
I_Exp<-rexp(n, rate = 1/114420)
summary(I_Exp)
quantile(I_Exp, probs = c(0.01,0.99,0.90, 0.25,0.5, 0.1, 0.05))
Tax_Exp<-rexp(n,rate=1/7)
summary(Tax_Exp)
quantile(Tax_Exp, probs = c(0.01,0.99,0.90, 0.25,0.5, 0.1, 0.05))


And so we end up with interesting results: the richest 1% have to pay some 31.47% income tax – which is still below the nominal existing rate, and the median rate 4.73% for those earning around 79,500 per annum. The same computations apply equally to different incomes: for a household earning 86,000 dirhams, the custom rate would be 5.72%. All you have to do is look at the probability value at which household income wt lies, then match it up with the corresponding rate – with perhaps an exemption for the bottom 10%. Households below 420,000 dhs income would benefit from this scheme: median income households of 75,500 dirhams would pay about 4,873 dirhams compared to the 10,325 dirhams they would pay under the present tax system. As a matter of fact, even households earning 173,918 dirhams would pay 10.91%, i.e. 18,978 dhs which is still below 41,900dhs they would pay under the existing tax code.

Again, receipts from the new tax system under this scheme would top the existing receipts to 46.4Bn dirhams, way more than the, again, existing 28.96Bn, with no prejudice to the overall fiscal pressure relative to GDP or GNI.

the boost in fiscal receipts is mainly due to the tax discrimination effect described above – and the elimination of a host of loopholes and tax breaks do contribute as well.

## Some Metrics on Income Distribution – More Details and Methodology

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco by Zouhair ABH on December 11, 2011

The argument about the nefarious effect of too concentrated an income in a particular country can always be made to gainsay any potential benefits to the trickle-down -or supply side- economics: while it is almost impossible -and probably counterproductive to enforce or allow for perfect, egalitarian distribution of income and wealth, evidence can buttress the case for a wide median/middle class, empowered with a large income share, and comforted in a steady and balanced growth in its wealth.

From a policy point of view, I believe the wages and income issues are perhaps the only thing that can bring together large scores of Moroccan populations whose cultural and political loyalties are too polarized, but eventually find solace in pledges to improve their standards of living, and would even go as far as support that political organization credible enough to reduce inequalities and guarantee steady income growth for all.

So, let us consider other metrics to income instead of GNI – a raw measure indeed, but one that does not provide precise information on generated income; fortunately, national accounting can provide us with a bit of help to devise some custom-made aggregate for National Domestic Income. World Bank data defines the Gross National Income aggregate (code NY.GNY.TOTL.KN [xls]) it provides as:

Gross national income is derived as the sum of GNP and the terms of trade adjustment. Data are in constant local currency.

Though Gross Domestic Income grew at a higher pace starting from early 2000s, FDIs and MRE remittances made significant differences between GNI and GDI

Clearly there are some components one isn’t very interested in; the figure of interest should be purely domestic – we are, after all, interested in domestic income. Because GNI is basically the sum of domestic income and primary income from abroad, we can therefore compute it with net foreign income from FDIs, Workers’ remittances and portfolio inflows.

There is always the delicate question of remittances: for only too many households, remittances from relatives working abroad are the only source of income, and in a sense, it distorts somehow the big picture one is keen on painting; but there goes the limitations of data availability – the local Morccan office for national statistics (Haut Commissariat au Plan – HCP) does not provide adequate format for data processing, if it ever does; I am grateful for many of their documents, but there is no comprehensive plan to upload relevant data, say in xls or csv format; as for the World Bank, they can only put online what the Moroccan authorities are giving them – any additional information needs to be paid for, and I don’t think I have the money for it 🙂

But still, even with these rule-of-thumb, back-of-the-envelope computations, final results are not as bad as one may make out; quite the opposite, they seem to be quite close to whatever comes up in official reports. Still and all, it is always good exercise to investigate whatever figures of interest.

Now, rearranged figures show that domestic income distribution per deciles and quantiles are on the low side when compared to GNI breakdown – which is only logical, given the computed differences in FDI and remittances – nonetheless, one finds out that upper 20% and 10% within still benefit from a high annual income: for the wealthiest 10%, it was MAD 222,000 per annum in 1999, it neared 400,000 in 2010 – while average domestic income was MAD 71,000 in 1999, it increased to MAD 106,000 in 2010.

It is clear that the average annual increase was higher for the richest 10% (+5.47%) than the observed average (3.7%) and that applies only to domestic income. As for median income, an annual increase of 2.5% was recorded over the considered 12-years time period, growing from 53,000 to 70,000 per annum, and in constant terms; the conjugated effects of a base 1999 inflation (CPI) and the downgrade in income distribution to the expenses of median households vindicates the claim made in an earlier post that median households have lost purchasing power to monetary illusion.

during the considered 12 years, CPI inflation (base year 1999 instead of HCP’s ICV base year 2006) was at annual average of 3.4%, in addition to the annual 1.14% dent in median income share, this means a real discount of 4.54% on any nominal income increase; it stems from the number computed earlier on (2.5%) that there was significant loss to real purchasing power to this class of households – relatively higher, when compared to a GNI-based computations, and this only makes sense: foreign currency inflows are not subject to the same inflationary distortions, and so, tend to make up partially for the purchasing power downgrade, across the board.

+80% of top 10% and +50% for the average - over 12 years.

But the bottom line of the argument made earlier is vindicated by these findings: middle class are hurt in their income, and this comes to a blow, because a balanced society with low risks for social unrest needs a strong and wide middle class base – if this is observable in a host of country, there is good reason to believe that it would apply equally to Morocco as well.

But let is now consider something different, less dynamic – the present distribution of income as it were. In statistics, probability distribution are quite useful to assess, in this case, wealth distribution across households – we start from the purest egalitarian distribution of all, the uniform distribution.

Uniform/Egalitarian: very easy a computation, just take every household, number them from 1 to 6.5156.000 (approximately) and then allocate them with the same income, namely GNI per household. Median, Average and Variance are clearly defined and everything is fine. This how an egalitarian society would look like: all households deciles would have the same income, i.e. 106,000 per annum with uniform growth per household from 1999 and 2010. The only snag is that it is utopian and almost impossible to enforce. Plus there are no immediate economic benefits to such a distribution: can we expect growth if everyone is insured to have the same income as the others regardless of their contribution to society?

Normal (or Laplace-Gauss) distribution: a little more complicated a distribution, but one that remains within the realm of acceptable inequality: the bell curve distribution concentrates quite a lot around the mean (which coincides with the median too) as a matter of fact about 66% of all relevant information lies very close to the mean. Now, considering the distribution at hand with a GDI per household capita of 106,000, and say 36,000 as a variance, we get a pretty decent income equability, as the graph below would show:

the wealthiest 10% households would represent no more than 131,000 - less than two variances away from the mean

But then again, that would be too good to be true – though it is realistically more achievable, and the case for a strong and wide middle class can then be made more forcefully.

Generated Pareto distribution vs Empiricial distribution per deciles

Pareto Distribution:and this is the last distribution one should have a look at, because as far as available empirical data goes, this is the closest we can get to the real income distribution in Morocco. And it all adds up: as we observe average income per households is 106,000, there are 30% households above that line capturing 60% of total Domestic Income.

We compare and confirm that incomes in Morocco follow very closely a Pareto-like distribution, which denotes of its unequal distribution indeed.

Finally, it is enough to look at the Gini index to understand why the Pareto-shaped distribution in Morocco is so unequal: HCP’s own computations put the Gini Index at 0.46, certainly one of the highest in the world. According to the United States 2008 Census, their 2009 income Gini Index was around 0.469 – very close to Morocco’s. What does this tell about our own economy?

I would suggest that we have achieved the same level of income concentration as the United States’, but ultimately failed to raise standards of living for the middle and median classes, not even commensurate to the selected benchmark’s own growth over 1999-2010.

Generated Data (computed on R open-source software) shows:

#data computed for a normal distribution,
#with average 106 and standard deviation of 20
Distribution_Income <- rnorm(6516, mean=106, sd=20)
Income_Norm<-dnorm(6000, mean=106,sd=36)
plot(density(Distribution_Income, bw=4),col="Black", lwd=4)
hist(Distribution_Income, col="tomato4",
main="Generated Normal Income Distribution",
xlab= "Income Per Household (thousands dirhams)",
ylab= "Number Of Households in Thousands")
#Monte Carlo-like simulation to test mean and median convergence
Distribution_Income_MC<-rep(Distribution_Income, each=1000)
vector_generated<-c(summary(Distribution_Income_MC))
summary(vector_generated)
# Min. 1st Qu.  Median    Mean 3rd Qu.    Max.
#34.48   95.76  106.10  105.80  116.10  176.10
#compute the income share held by the 10% wealthiest (quintile above 90%)
qnorm(0.90, mean = 106, sd = 20, lower.tail = TRUE, log.p = FALSE)
#[1] 131.631
#-----------------------------------------------------------------------
#Pareto Distribution
#need to setup "VGAM" Package
library(VGAM)
Distribution_Income_Pareto<-rpareto(6516, 106, 100)
summary(Distribution_Income_Pareto)
hist(Distribution_Income_Pareto, probability=TRUE, col="wheat4",
main="Income Distribution Per Pareto",
xlab="Income per Household in Thousands")
#minimum value 100 selected gets the closest to empirical distribution

## 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.