The Moorish Wanderer

Policy Proposals on Taxation, Part.2

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard, The Wanderer by Zouhair ABH on March 6, 2011

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.

Since the 1980s, consumption share remained stable (compared to the previous 30 years)

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.

An almost logarithmic progression of effective productivity per worker (U.Penn figures)

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.

An almost pure distribution of consumption tax

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.

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.