The Moorish Wanderer

Taxes and Politics – Why We Should Scrap VAT and Stamp Duties

Posted in Dismal Economics, Flash News, Morocco, Read & Heard by Zouhair ABH on April 1, 2012

The principal line of defence in Mr Nizar Baraka’s own political narrative, along that of Mr Idrissi (his Budget pal) is that they are both a-political, technocratic officials recently (?) painted in Istiqlal or PJD colours. And in that sense, the broad lines of the Budget bill they have presented before Parliament tend to vindicate their MINEFI-focused scope.

VAT and miscellaneous tax duties and receipts make up for 41% of current budget receipts, a third when public borrowings are included. In contrast, direct taxes, corporate and income account for 27% of total budget receipts, and a little over a third of non-borrowed receipts. These sizeable discrepancies, i.e. higher returns from stamp duties and taxes on various consumptions contradict the idea of an expansionary budget, given the important role domestic consumption is most likely to play in picking up a flailing growth for 2012. So one way to explain it is the political economy of Morocco’s public finances: indirect taxation contributes more because it is easier for the State to extract resources from it, and because it is easier to identify.Macroeconomic aggregates speak for themselves: fiscal pressure on incomes amounts to 6%; fiscal pressure on domestic consumption, about 12.56%: on average, the State will take only 4% of your income, but tax 13% of your consumption – and that is so because while it is difficult for the Inland Revenue to get a correct appraisal of your income, they sure can pinpoint your consumption. What is more, whenever you buy/sell some Real Estate property or any other similar businesses, the tax-man can get to you and skim 4% in stamp duties, customs and other bureaucratic taxes – because the State can.

This is an interesting body of evidence to consider: we are indeed facing a weak State, weak in I. Wallerstein‘s sense, a central authority with broad political powers (what many Moroccan activists refer to as ‘the Absolutist Regime’) but ultimately unable to identify and extract resources from sources of wealth and income. This inability can be explained by inherent corruption, what economists refer to as a lack of rule of law. Now, corruption can be illegal, but it can also be a very institutional, very proper arrangement: the moratorium on the Agritax is a sell-out of sorts: big, wealthy farmers provide support for our unelected leaders, and in return, they get tax breaks, exemptions and subsidies, and an annual 10Bn dirhams boondoggle that is the Plan Maroc Vert.

The top 10% households spend 90Bn in consumption, a third of total household consumption - in line with HCP figures.

Since the idea of fairness is very subjective, and finds ideological interpretations in the field of policy-making, I would argue the most obvious quantitative implication of my idea of fairness is based on the statistical distribution of the considered aggregate: for instance, if you income falls close to the median or the average, you should pay an income tax with a commensurate rate; same goes for consumption or property value. Ideally, you would pay specific rates on specific items according to a pre-established, economically-justified rule. That means, in essence, that VAT should be scrapped, income tax has to be reformed, and no one has to pay stamp duties – the ideal system would be to increase fiscal receipts and at the same time cut the effective tax burden by spreading the tax base, and there is evidence it can be achieved.

VAT is a bad policy instrument from an economic point of view, but on the other hand, and because there our elected representatives and their government lack political courage to carry out a ballsy reform, VAT remains the most adequate fiscal instrument with which the Budget can finance itself. After all, it is easier to target a 43,370 dirhams household consumption than the 30Bn profits from the Stock Exchange, or the 120Bn from Agriculture. Plus VAT is -by definition- inevitably paid for by the final consumer, the Moroccan households, to the tune of 7,800 dirhams – 18% of their consumption, that is; the trouble is the lack of economic justification to the choice of VAT rates: it is clear the weighted average VAT rate is close to the marginal 20%, perhaps because a third of household consumption is captured by the wealthiest 10% households – and these tend to consume goods and services taxed at 20%. If anything, a composite, mean-tested consumption tax can yield higher receipts for the Treasury, reduce fiscal pressure on household consumption and solve our Trade Balance deficit problem. I might devote another post about it.

As for stamp duties, 92% comes from import and energy goods tariffs. Great stuff considering the amount of money spent on the Compensation Fund…