The Moorish Wanderer

Tax Cuts. Yes, It Works, too

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on December 27, 2012

I was led to believe backing specific policies out of deliberate investigation was not about politics. Tax cuts are not particularly popular with those of my political persuasion down here in Morocco.

There is a lot to be discussed about the cognitive dissonance in electoral manifestos: low taxes, big social programs, no deficits, no debt, high growth, etc. and these are routinely enumerated regardless of ideological loyalties, with some nuances and priorities. You know how the alternate argument goes: electoral manifestos are window-dressing, there is a ‘permanent manifesto’ no one votes for, impervious to the weathercock of partisan politics, and based on solid McKinsey-made PowerPoint presentations. Yet even this perpetual grand design boast performing miracles at low costs, present, future, sunk, hidden or otherwise.

Tax Credit for investment do not have the same impact, but they are more persistent

Tax Credit for investment do not have the same impact on growth, but they are more persistent.

So what is new with tax cuts, and why would they be a better budget policy? First, because the stimulus effect delivered by a tax cut generates on average 8 times more growth than similar amounts engaged in a deficit-spending program; This is not a case against government spending, it is a reliable evidence that points to the inefficiencies of a one-sided stimulus program, which is usually favoured by the people I mentioned before. Targeted programs with prerequisite random experiments, smart regulation and rationality-based policies are the way to go (by the way, I have yet to read the results from testing programs launched under Mr Baraka when he was at MAGG, or Mr Boulif’s agenda)

And this leads me to the salient result from tax cut programs: not all tax cuts are created equal: Investment Tax Credits are by far the most effective policy, and the effect of a generic tax credit to investment produces on the long run a more persistent and net positive impact than any other exogenous shocks that boost productivity.

A caveat however: not all investment projects have these virtuous effects on growth. Expanding physical capital has some positive externalities, but not all physical capital generates it: building a research facility yes, banking on real estate development to create growth, not so much.

A quick look at the budget documents show tax credits allocated to the building sector amount to around 3Bn dirhams, and increased 4% in quarterly rate between 2011 and 2012 – so on the basis of these predictions, the expanded tax credit should have generated an additional .15 point to annual growth – a figure to compare with the sector’s growth, the lowest in positive sector growth. Of course, a rational explanation would state my model is not working. Another would assert tax credit are wasted on the building sector.


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.