• Solidarity Tax
Article:

Solidarity Tax

19 April 2016

Magda Nel , International Liason Partner |

In his Budget Speech 2016, the Minister emphasised that the tax policy reform agenda will continue over the MTEF (Medium Term Expenditure Framework).  The focus is to broaden and deepen the tax base and also to make the tax system more progressive, so that it contributes positively to the social objectives of reducing income inequalities.

One of the proposals investigated is the implementation of a Solidarity Tax.  Solidarity tax is a government-imposed tax levied in an attempt to provide funding towards theoretically unifying projects.  Solidarity tax has been introduced in several nations, most notably Germany and France.  It is normally intended to be a short-term surcharge on top of regular income taxes.

If one looks at the benefits of such a short-term surcharge, it would reason to look at countries where this tax has been implemented and collected for a number of years.  In Germany, a 5,5% surcharge on income tax was instituted to restore the infrastructure of Eastern Germany to the levels of the Western ones after the Fall of the Wall.   This German tax surcharge, which raises €11 billion a year, will be maintained until 2019 at least, and economists are divided as to whether it has been effective, for example, since the reunification, the unemployment rate in the east has been almost twice that of the west, and although the “The gap is closing.” – it seems to be anything but a short term surcharge.

In France, Impôt e Solidarité sur la Fortune  (ISF) is controversial, critics claim it drives away wealthy individuals from the country, resulting in financial loss. There is also a concern that some taxpayers cannot pay the solidarity tax because of the burden of income tax.

Statistics in France show that solidarity tax receipts represented 0,5% of the tax base (2013) and approximately 0,6% of total net wealth.  The conclusion was that even if these had been transferred to poor households, its direct impact on wealth inequality would have been negligible.  This tax is a therefore a negligible contribution to the budget, a tax with a narrow tax base, and at quite a high rate, which fuels immigration to more favorable tax jurisdictions by those impacted. The contribution to poor households is difficult to measure and notably, one reads very little on how the poor have benefited from this.

In conclusion, wealth tax in a country is more efficient to repel the rich and encourage them to withdraw their investments than to effectively redistribute wealth to the poor.

In Namibia, the purpose of this surcharge will be to eradicate poverty by 2025. This tax acts in conjunction with income taxes and solidarity tax is usually calculated based on a percentage of the tax bill.  Namibian taxpayers over a certain threshold (currently indicated as those earning more than N$ 78 000 pa), would pay a further percentage on their calculated tax.

Namibians from all sectors are wondering whether a further tax imposed on Namibians who already comply with the law is the answer, whilst government spending seems dis-proportionately high in areas such as new office buildings, support to unprofitable parastatals and waste in government departments.   Whilst the new solidarity tax may contribute an estimated N$600m per annum in tax revenues, these funds would not last long if not channeled directly to the poor.  In addition, taxing upcoming middle class citizens would only result in making them poor once again.   The tax will apparently be levied on those earning more than N$ 78 000 per annum or N$ 6 800 per month, hardly wealthy citizens.

It should also be noted that the tax base in Namibia is not very broad and many informal operators are not in the tax system at all or are paying “informal” taxes by supporting their elderly family.  The European countries that have instituted this type of tax with some success have a very broad tax base (for example France had 37,2 million taxpayers in 2014), and cannot be compared to the number of “wealthy” taxpayers in Namibia.  The Minister would do well to broaden the country’s tax base, identifying all those who should pay tax, and enforcing the Income Tax law to let everyone contribute to the country’s finances. 

Poverty is not just about income “said Amargtya Sen, and one wonders if initiatives to directly combat unemployment, concentration on quality of education and training for the job market would not better serve the eradiation of poverty. Private individuals and corporates are more likely to contribute directly to initiatives such as food banks, schools and training initiatives if the contributions they make can be associated directly to specific projects.  The food bank initiative of government is an example of a commendable initiative and with private sector input can be very successful.

To quote the Honourable Minister:  “not everything that counts can be counted, and not everything that can be counted counts”. More funding therefore does not necessarily guarantee greater success. Policy reforms, innovation, integrity of institutions, internal efficiency and implementation capacity are critical determinants of successful outcomes and accelerated results. This should form the main defining strategy for Offices/ Ministries and Agencies.”

It is clear that much more needs to be done and we agree that the proposed Solidarity Tax is not fully understood by various sections of society. Therefore, targeted funding from this Tax need to be well defined.  The Minister promised to continue to engage the public on the specific tax proposal for a broader understanding on the benefit, principles and administrative arrangements for this national intervention and one trusts that the concerns of ordinary Namibians will be taken seriously before implementing this tax.

In conclusion, Namibians would embrace this new tax if government provide an accurate and fair tax collection system, with excellent service from the Revenue departments that serves the public interest, if the Minister can deliver on Integrity and Efficiency in Government Institutions, notably the Receiver of Revenue’s offices, and guarantee that this tax would be ring-fenced and not go towards funding non profitable parastatals and grand buildings for Ministries and Parastatals.