By Amin Kef Sesay
Against the background of the strike yesterday by businesses in the capital city, one can easily understand the dilemma faced by the National Revenue Authority in carrying out its constitutional mandate of raising revenue through taxation to enable the Government perform its core functions which without adequate financial resources at its disposal it cannot perform effectively and satisfactorily.
We all know that the basic objective of taxation is to raise resources for the State which can be used to reduce inequalities, accelerate economic development, and regulate consumption, control imports and exports, in addition to its basic objective of raising revenues.
Taxes generally contribute to the Gross Domestic Product (GDP) of a country. Because of this contribution, taxes help spur economic growth which in turn has a ripple effect on the country’s economy; raising the standard of living, increasing job creation, etc.
However, the danger is when the State depends too much on taxes to raise revenue. In the case of Sierra Leone, which has a very large informal sector, that is very hard to tax, the burden of raising tax revenue for the State falls largely on the formal business sector which is very small.
In terms of calibrating the economy, by increasing or decreasing taxes, the Government can affect households’ level of disposable income (after-tax income).
A tax increase will decrease disposable income, because it takes money out of households. Correspondingly, a tax decrease will increase disposable income, because it leaves households with more money.
Against this background, NRA finds it hard to raise sufficient tax revenue for the State because income and consumer taxes are hard to calculate since employment and shopping occur mainly in the informal sector.
We should now ask ourselves the question: what happens when taxes increase?
High marginal tax rates discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. However, tax cuts can also slow long-run economic growth by increasing deficits. This is the dilemma NRA and the Government face; hence the reason why the Electronic Cash Machines were introduced, which businesses argue increase their costs.
The ECR Machines are to enable NRA better collect Goods and Services taxes which are basically a sales tax. Since sales tax increases the price of goods, it becomes more difficult for businesses to profit from selling goods, or that consumers change their buying behaviour to purchase less of the more-expensive goods.
Impact on Demand
Sales tax also impacts consumers’ buying power. When sales tax rates are high, consumers spend more money on taxes and have less to spend on additional goods. This drives down general demand or forces businesses to reduce prices to keep demand steady. This effect holds true even for items that are not subject to sales tax.
Thus, the extent to which sales taxes impact supply and demand, and the form that the impact takes, depends on how businesses incorporate sales taxes into their pricing structures.
When a State/ Government increases its sales tax, businesses may choose to leave prices where they are and simply earn less profit per sale.
Businesses also can choose to pass these taxes along to customers through increased prices, which can have a significant impact on supply and demand.
Governments must therefore examine these issues before imposing new taxes, thereby allowing businesses to adjust their pricing structures to account for slight changes to sales tax rates.
