The real key for African tax policy

African countries would be far better advised to focus on ways to fix the attractiveness of their own domestic economies, including tax systems, than to wait for the world to develop a new taxation system.

ANALYSIS | MUKHISA KITUYI & DANIEL A. WITT | A piece in the Financial Times published in conjunction with the recent IMF/World Bank Annual Meetings asked whether the world can avoid the “tepid Twenties” a decade in which the world mostly avoids economic decline but misses a real opportunity for the economic growth that will lift millions from poverty and provide funding to achieve the Sustainable Development Goals.

While the article focused on the West, there are real implications for Africa. As Ian Bremmer, who founded the Eurasia Group consultancy noted, “The problem over the past 50 years was not globalisation, it was globalism. It was decisions being made by a small number of beneficiaries that were very powerful”

And too often, that discussion is missing the most important element: how to design a tax system to promote economic growth, the economic growth that will drive revenue growth.

A focus on growth works, and Africa understands this more than most. Even though overall African growth fell to 3.2% last year, the African Development Bank expects real GDP growth of 3.8% in 2024 and 4.2% in 2025 — higher than the global rate and second only to Asia.

Consider Kenya, which the IMF expects will pass Angola to become the fourth-largest economy in sub-Saharan Africa this year and which is building that growth on the foundation of a very diverse economy not reliant on one dominant sector. Ethiopia, which had an economy smaller than Kenya in 2020, is also on a growth spurt and is expected to overtake Nigeria in 2026. Many African countries already enjoy fast growth: the AfDB forecasts that countries including Niger, Libya, Rwanda, Côte d’Ivoire, Ethiopia, Benin, Djibouti, Tanzania, Togo, and Uganda will all have growth at or above 6% – faster than China or the West.

More African countries should join this parade. When economic growth occurs, revenues will grow, too – revenues that countries can use for development, as the UN says it wants and as Africa needs.

Think, then, of a simple formula: Investment leads to employment, which leads to taxation, which leads to development. Tax revenues, in particular, cannot arise unless there are profitable businesses employing workers and investors, domestic or foreign, in those businesses. Now, African countries must work even harder to incentivise investments in a way consistent with the Pillar Two minimum international effective corporate tax rate of 15%.

That’s why the real priority must be growth. There is simply no way to achieve the Sustainable Development Goals without real, sustained economic growth that lifts people out of poverty, increases gender equality, builds national education and health systems, and provides funding for addressing climate change.

What are the alternatives to growth?

Not technology. Technology can produce growth  but technological advances of themselves do not replace the need for countries to focus on growth as an economic imperative. Greater adoption of AI, for instance, may improve productivity, but that of itself will not produce sustainable, broad-based growth. Instead, growth opens the way for greater adoption of new technologies, for instance in agriculture.

Not regulation. Sometimes even very technical rules on taxation can have an outsize impact on a country’s growth. A recent UN proposal to change the time required for a business’ “permanent establishment” (PE) in a country from 183 days down to 30 days is an example. This would strongly discourage investors to seek to explore opportunities in a new country. And while the UN rightly pushes the energy transition, its tax committee seeks to extend the rules on PE to cover renewable energy as well as extraction. Why would the UN want to discourage investment in renewables? But that is exactly what the provision would do.

Not resource mobilisation by itself. The IMF’s International Group of Twenty-Four on International Monetary Affairs and Development recently discussed the “crucial” role of domestic resource mobilisation for “funding sustainable development, particularly in light of decreasing overseas development assistance and private market financing.”

Developing countries should seek to close the “tax gap.” But by definition, if private market financing is declining, something is already wrong with a system that is supposed to attract investment. Capital goes where it is wanted and where it can seek returns.

However well-intentioned some of the international ideas may be, they could harm growth – and may well not be adopted in any event, because taxation is a core function of sovereignty, and countries will be loath to yield it to an international authority. Thus, countries would be far better advised to focus on ways to fix the attractiveness of their own domestic economies, including tax systems, for investment than to wait for the world to develop a new taxation system.

Of course, there are important steps that countries should take even while focusing on growth: improve transparency in tax systems (and digitise them), make tax administration fairer and more predictable, and bring more businesses into the formal economy where they will pay tax. African countries including South Africa, Mozambique, and Zambia have made important reforms in these areas. But those steps cannot obscure the reality that growth should be the heart of tax policy.

Nor is this phenomenon of deemphasising growth limited to Africa. Describing economic debates in the US, former chairman of the US Council of Economic Advisors Glenn Hubbard recently wrote that “[a] society without growth requires someone to be worse off for you to be better off. Growth breaks that zero-sum link [.]” This reminder of basic economics is essential to understanding why growth, rather than simply increasing revenues, must be the objective of fiscal policy. The best policies are those which promote “win-win” outcomes for both government and the private sector as opposed to “zero sum” outcomes that aim for maximising revenue — and will likely miss.

The time for growth is now. The imperative is clear. African business can be a powerful voice for growth, demonstrating the results it brings for development. Focus on growth, and Africa will be the continent to watch this century.

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Dr. Mukhisa Kituyi served as Kenyan Minister of Trade and Industry and Secretary-General of the UN Conference on Trade and Development. Daniel A. Witt is Founder and President of the International Tax and Investment Center.

Source: African.business