Gift Kasika

Money and credit play an important role in stabilising the state of any economy in today’s financial system. 

Understanding how different institutions and elements affect components that make up the income spending stream is the starting point in understanding the concept of economic stability and the disturbances that may result and the possible stabilisation policies that may be undertaken to restore stability from an unstable state.

The income spending stream refers to the continual circulation of money from one economic unit to another. 

The purchasing of the public ends up in the hands of suppliers of the purchased goods and services and, therefore, becomes their income.

They also finance their purchases of inputs, rent and labour with this money, and the process continues circularly. 

Households earn money through wages and salaries for the labour they provide to companies and the government, and then spend that money on goods and services provided by businesses and the government, ensuring a continuous flow of funds in the economy. 

The circular flow of income is a simple way to visualise how money constantly circulates between households and businesses within an economy.

The circular flow of income consists of four components: the businesses or companies that produce goods and pay wages to employees, and the households or individuals who receive wages from companies while simultaneously purchasing the goods and services from the businesses. 

Third is the government which receives taxes from businesses and households, then uses tax revenues to provide public services. The fourth and last is the foreign sector which is responsible for the export and import of goods, thus facilitating an exchange of money between the domestic economy and the rest of the world. 

To improve the financial position of corporations, a solution would be adopting policies that will improve their financial standing and attract more foreign investments into the country. Namibia has a corporate tax of up to 32% and a progressive tax rate of 37%. 

The tax rates represent leakages from the income spending stream. This is the money being withdrawn from the spending stream although it will be used to provide public services and pay salaries to government employees. 

The World Bank development report states that developing countries have higher corporate tax compared to their developed counterparts which according to them explains the unattractiveness of Foreign Direct Investments (FDI) into developing countries. It is a common fact that higher tax rates reduce after-tax returns of corporates which may reduce their incentives to commit investment funds. With the above said, I chose to disagree with the view of the World Bank.

When evaluating the relationship between corporate investment and corporate taxation, it is important to note that corporates simultaneously take account of many other factors besides taxation in their investment decision. Among others, factors such as political stability, the stability of the monetary and fiscal framework, corruption ratings of the country, market characteristics such as the market size, labour force skills, and the state of the infrastructure networks, access to the required factor inputs, labour and labour laws, raw materials, energy supply stability, the ease of doing business, the investment laws, and many others. All of the above will have to be provided by the government and government will therefore need money for each.

Developing countries have a greater reliance on tax incentives as a means of attracting FDI as it is reflected in the gradual decline of their tax base instead of broadening the tax bases which is a result of tax cuts. 

Businesses and FDI require basic investment climate conditions to commit their investments. Cutting tax rates can be pointless unless the investment climate has attained the desired level. After all, investment decisions do not only depend on the tax burden but also the availability of public goods financed with tax revenues such as road networks, communication networks, security, and so forth. No one would want to invest in a country where their safety is not guaranteed or a place where armed robbery of businesses is a recurrence due to insufficient security provided by government forces due to lake of funds.

When revising the corporate tax rate to attract (FDI), we have to take into consideration that good infrastructures which as well attract FDI have to be financed from the corporate tax revenues, a very low tax rate might be attractive to FDI but it won’t serve the purpose of upgrading and maintaining supplementing infrastructure to retain the newly attracted FDI. The two interests need to be reconciled. We are currently rated as having the best road networks in Africa, that one alone can attract outsiders to come and do business, but we will need money to maintain the roads.

An empirical analysis of the correlations between a country’s public infrastructure quality and the likelihood of using tax incentives shows that countries that offer low tax rates also tend to offer tax incentives. Governments with close trading ties or under common economic zones strategically interact with one another and try to attract the mobile tax base through policy decisions. This mechanism depends on the mobility of the tax base. For example, businesses or capital are generally considered to be more mobile than individuals and mobile than property. As a result, international tax competition using capital taxation is stronger than tax competition using property taxation. Governments lower their corporate tax rates because businesses are mobile and free to locate or invest in another country with the lowest tax burden. If government feel that by lowering the tax rate, they can compensate for the worse infrastructure climate, it is possible that tax competition will become more aggressive.  

The corporate tax is not the only component of leakages, we also have imports from the international community, but this will be a topic for another day. Imports affect the balance of payment which to a certain extent reduces the income spending stream, money is leaving the country to buy goods outside the country. Export on the other hand represents an income injection which is the exact opposite of leakages. 

When investigating corporate taxation in developing countries it is important to consider tax incentives. Tax incentives are measures that provide for more favourable tax treatment of certain activities or sectors compared to what is granted to the general industry. 

To conclude, there is no need to succumb to international pressure to reduce the corporate tax rates while the government needs money to finance a conducive environment for the business community to flourish until such a point, we have reached the desired state of infrastructure. 

* Gift Kasika is a local economist.