The issue of taxation is one that has seriously been considered by economists since the time of Adam Smith (1723-1790) and the other classical economists, by the neo-classical economists and also by modern eminent economists.
Adam Smith wrote that
“There is no art which one government sooner learns of another, than that of draining money from the pockets of people.”
Every government, says Adam Smith, soon learns to impose taxes that take money from citizens. Adam Smith was not opposed to taxes. He however, believed that taxes “only succeeded in making life more expensive for the people while stifling industry and trade abroad. Adam Smith and associates believed that
“It is the cost of production that drives the value of goods and services.”
The Government’s role, said Adam Smith is to protect national borders; enforce civil law – legal rights, property rights and the punishment of crime; and engage in public works: providing education, construction of roads and bridges etc. For these roles, the government needed to impose taxes to collect the necessary revenue. Taxation, he said, should however, follow the principles of:
Fairness
Certainty
Convenience
Efficiency
Taxes were necessary, he said, but
“Taxes were bad only when they undermined the productive use of capital.”
Adam Smith was an advocate of free trade domestically and internationally, a principle that will lead to the equilibrium of the market forces of supply, demand and pricing; and would also in the long-run, lead to full employment. He believed that thrift and savings are important virtues; and that people should be encouraged to save their money for investment in trade as one of the principal ways for wealth creation. He believed that national wealth is created only by the labor of people.
Other principles of Adam Smith worth considering were as follows:
Taxation can be high if it is equitable.
The rich “should be taxed something more than in proportion to their wealth.”
The inequality of the worst kind was when taxes fall much heavier upon the poor than upon the rich.
Taxes on necessaries afflicted hardship on the poor.
Adam Smith advocated the avoidance of inequality in society and high government taxation. Flat taxes that impose the same tax proportion on the poor and on the rich are unfair, inconvenient, inefficient, and severely contribute to the creation of inequalities in society.
Neo-classical economic theory
It is against the background of the principles of the classical economists, that is, Adam Smith and associates: Thomas Malthus, David Ricardo etc, that both the neo-classical economists and the modern day eminent economists, as said earlier, Alfred Marshall, John Maynard Keynes and Milton Friedman, have made their interventions and contributions.
While the neo-classical economists supported the principle of encouraging savings and investment and the removal of unnecessary trade regulations, they advocated
Efficient allocation of limited productive resources
Demand as the key driver of the value of goods and services
Control of the growth of money supply to ensure low inflation
Reduction in taxation in order to encourage enterprise (since high taxation discourages enterprise and hard work)
For example, each African country should identify its valuable non-renewable resources and ensure that these are made available only to limited number of productive industries, with government participation wherever possible.
Secondly, following the principles of fairness, convenience and efficiency, governments should put more emphasis on the provision of goods and services for which there is high demand: water, electricity etc. Government should besides this, find ways for supporting private sector production of goods and services for which there is high public demand.
Other recommendations, indicated above, include control of money supply and the reduction of taxation.
Keynesian economic principles
From the early 1900s, Keynes did not agree with the idea that savings alone could provide the necessary funds for investment in a country. He believed in taxation, but recommended that
Taxation should be minimized to increase spending.
Interest rates should also be reduced to discourage savings (and increase spending).
His view was that taxation and interest rates should be reduced in order to compel people to spend more; and that government should rather increase its level of public spending.
The post 1970 period
The period after 1970 was characterized by inflation and unemployment in the western world.
The continued expenditure of governments could consequently not provide effective solution to the economic turbulence of the time. The Keynesian economic theory was therefore abandoned for the monetarist theory of Milton Friedman.
Milton Friedman
The monetarist theory stipulates that money supply from the central banks, including physical currency, deposits and credit, constitute the primary factor that affects demand in an economy.
Friedman believed in free market capitalism. The monetarists believed that high money supply leads to the following:
Stable market prices
Modest inflation
Modest interest rates
Maximum employment
Weak money supply, on the other hand, leads to low production, high unemployment etc.
The post 1970 period witnessed a period of continued population growth and the depletion of available resources leading to slow economic growth. This was a period in which government continued money supply, entailing high government expenditure and inflation, was not an appropriate solution.
Current position
In the above inflationary circumstances, the Friedman monetarist principles of money supply were abandoned in favour of the Neo-Classical economic principles of the 18th and 19th centuries which advocated the current position involving the following:
Control of money supply to ensure low inflation
Reduction of taxation to encourage enterprise and hard work,
Non-interference of government in times of economic crisis
Implementation of policies of free trade and free markets
It is these principles that will, it is believed, ensure that “markets will always settle at full employment equilibrium in the long run.”
What next?
It could be noted that over the past 250 years, economic policies in the western world have shifted from classical economic theories, to neo-classical theories, to Keynesian economic policies, to Friedman principles and back to the classical economic principle of the 18th and 19th centuries with the amendments of the neo-classical principles.
It could be realized that economics is not physics or mathematics and is influenced by human views and thinking and can go wrong at different times. A national economic problem will elicit ten different answers from ten economists. This is not helpful.
It could be noted that no one set of economic principles are adequate to deal with changing economic times and periods.
What is needed are therefore the following:
A blend of economic principles fashioned out from expert economists combined with the practical experiences of experts from different disciplines for solving economic problems at different periods
Low income taxation instead of high and unfair taxation to help business capital accumulation by citizens
A focus on the classical economic principles on the role of governments
Reduction of taxation on necessaries that afflict hardship on the poor
Reduction in government spending
Avoidance of inequality in society by flat taxes that have more disastrous effects on the poor than on the rich
Encouragement and incentives for viable businesses to grow, expand, and open up new job opportunities.
Encouragement of the use of the imagination of talented individuals to create and invent new goods and items for the industrial and services sectors.
The above eight issues are basically from the principles of classical economic theory and the amendments of neo-classical principles. It needs to be emphasized however, that Adam smith was not an economist to start with. He studied Social Philosophy and became a Professor of Moral Philosophy at the University of Glasgow. It was during his lectures and travels through Europe that he developed the free-market theory; the concepts of division of labour and market competition that lead to economic prosperity. By keen observation and imagination, Adam Smith emerged as the “The Father of Economics” especially after his book on the “The Wealth of Nations.”
Why have these been impossible for Africa?
First, events over the years, since coups d’état started in Africa in 1960, show that industrialists and successful business persons in Africa are unfortunately arrested and molested as “enemies of the people”; their businesses taken over by the government, instead of government support and encouragement.
Mark Anthony, in his speech at the burial of Julius Caesar said:
“Oh judgment ! Thou art fled to brutish beasts (in reference to Brutus and his gang), And men have lost their reason.
This quote is used not in reference to coup makers in Africa, but is used to refer to the African society as a whole. The rich industrialists of the continent who risk their own money to set up businesses to provide jobs and make some profit are those periodically hounded in coups d’état. It is these industrialists who also face business collapse under unfavourable government economic policies! There is obviously some serious misunderstanding here. Destroying business persons and their businesses is the simplest way of destroying the very source of tax contributions to the national revenue.
Second, political parties making extravagant promises far above their capacity during electioneering campaigns; and thereby getting more involved in national development issues; consequently doing more than is required of them.
Third, governments neglecting their basic role in the provision of infrastructure: roads, bridges, schools, hospitals etc.
Fourth, self-interest of government appointees and officials by indulging in extensive corruption in amassing wealth
Fifth, the timidity of governments to renegotiate the terms for the exploitation and use of the natural resources in African countries; terms that were contracted during the colonial era. The natural resources of the continent should become the financial backbone of the countries of the continent and should be relied upon to contribute fair returns to the economy of respective African countries.
Sixth, African governments borrowing more than is necessary from local and international sources and thereby entailing demand for more taxes from citizens. It is this constant taxation that takes away the capital of citizens and destroys the interaction of the demand-supply-pricing network; causing inflation and unemployment.
African debts to China by mid-2020
By the end of June 2020, for example, the debts of some African countries owed to China and the percentage of the loans against the GDP of the countries involved by the end of June 2020 are indicated as follows. For reasons of proprietary, the names of the countries involved are omitted.Screenshot 2022-10-16 at 5.01.08 AM.png70.7 KB
Countries borrow as a normal process; but contracting debts up to 30% and 42%, in case of three African countries above, and currently up to more than 100% can spell disaster for citizens. Apart from debts to China, countries could also have contracted other bilateral loans and loans from international sources such as the World Bank.
Milton Freidman does not consider debt to GDP as important, because as he said, America could run up debts up to 100 percent of GDP with no trouble. Debt to GDP ratio of 100% to America is no problem because the country has a very large revenue base. The same thing cannot be said of African countries that are still operating colonial economies with major portions of their natural resources operated by foreign companies on annual royalties of less than 10 percent.
In China itself, it was the introduction of economic liberalization with its free-market principles
into a purely socialist economy by the political leader Deng Xiaoping in 1985, that ushered China into a pace of rapid industrialization with accompanying rapid financial growth. Africa has never attempted any significant economic moves as has occurred in China in the years after the independence period of 1960.
It is these concerns that put many African countries in very precarious conditions. It is these concerns that cause hardships in the life of the citizens of African countries: High and unbearable taxes; extremely little social welfare facilities; and a life of perpetual drudgery for the average African.
There are countries in the world where no one pays income tax. And there are also some states in America where no one pays income tax. If African governments would consider some of the issues raised in this article, it is possible that a turn around in the fortunes of the continent could create national wealth with lower income taxes. This will be the significant factor that will encourage citizens to create business capital, a vital step in the quest to create prosperity for the people of the continent and for the nations of the continent.
