By Francis Muma, PhD Candidate in International Economics and Business at Xiamen University in People’s Republic of China
I HAVE listened with interest to the debate on the windfall tax—a tax which seems to find so much favour in some quarters. We are told that the windfall tax is a one-off, but it seems to me to be spread over a span of corporate years.
Therefore, like most taxes, it will have downstream consequences and an ever-growing tail of expenditure, which will cause considerable difficulties for the Ministry of Finance in future years. Windfall tax is merely a tax levied on any supernormal profit or to use a street language it is simply a tax paid by fat cats.
I believe that the only honest way to raise tax to tackle a difficult situation is by means of income tax.
It is immediate, quick and effective of taxation. I am not sure that to grab a windfall tax just because it is handy is the best way to proceed and I fear that, in the long term, it will be proven not to have been a wise way to proceed. Essentially for any country to raise tax is to increase GDP so that fiscal revenue per GDP (T/GDP) is raised and maximised.
How do you achieve this? This is simple if you encourage investment, but how can you encourage investment if you are creating disincentives for the main drivers of economic growth by coming up with such taxes like windfall tax?
The windfall tax will erode the investment potential of those on whom it is levied. Moreover, despite the fact that windfall tax is consumption based there is no guarantee that this revenue will be effectively efficiently used in the wake of this financial abuse and corruption in most developing nations which is a chronically invested disease. This can be explicit or implicit form of corruption.
I am not particularly in favour of the windfall tax because it is a one-off tax and once the companies have been taxed and are not making any supernormal (abnormal) profit they cannot be taxed again.
On the global economy, none of the tiger economies including China would do anything so rash as to institute a windfall tax on profitable enterprises that have been recently privatised.
The imposition of a windfall tax may cost jobs. It certainly diminishes mines’ profitability and their ability to invest in schemes such as mineral explorations, which is crucial to Zambia’s long-term competitiveness against other mineral producing nations. All those potential consequences are wholly negative.
Proponents of the windfall levy argue that the tax is entirely fair, as it is based on the fundamental principle of social justice. We have seen the size of the profits on which the tax will draw. Given how the tax will be used, it is wholly right and wholly justified. It is a tax which will pay for a future.
It is what the Zambian people so overwhelmingly endorsed in the past ( through their representatives at Parliament).
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Proponents of the windfall levy argue that the tax is entirely fair, as it is based on the fundamental principle of social justice. We have seen the size of the profits on which the tax will draw. Given how the tax will be used, it is wholly right and wholly justified. It is a tax which will pay for a future.[/pullquote]
However, I want to argue that, windfall tax just encourages consumption which is bad for any developing nation, for any growth driven country it should tax more consumption and tax less of investment. Only when you are at higher mass of consumption stage should you tax less of consumption and tax more of investment to avoid consequences of under-heating resulting from deflation effects.
Then there are the people who want a “ windfall tax” on mining companies. Now don’t get me wrong. I have no more love for large corporations than I do for any other bureaucracy, but let’s think about this in terms of sheer economics. Mining companies exist for one reason: to make a profit. That’s usually the reason that any business exists. As such, the owners of said companies like to maintain the same profit as a percentage of the cost of doing business. Put simply, if it costs more to extract copper from the earth, then these companies are going to charge you more for it.
Taxes are just another cost of doing business, and if a mining company’s taxes go up, guess where they’re going to make up for that. If you said, “By raising prices,” congratulations! You just might be qualified to hold a real job. As you may argue that so what if the copper prices go up, since we do not use it as a finished good and in fact we have every reason to benefit. This is entirely wrong, copper prices are exogenously determined, they are outside the model of parameters of producers, it is not the suppliers who determine this price but ‘demanders’ through LME and others in Shanghai.
So by producers of copper increasing the prices will just be uncompetitive and hence out marketing themselves. Above all rising of copper prices has ripple effects on the ultimate finished products that come back to the countries like Zambia as imports such as cables, electrical appliances, phones and other electronic gadgets.
If you said, “By cutting into their profits,” well, you may be stuck with job prospects, as job creation will definitely dwindle, with dwindling of employment there will even be less direct tax revenue to the Government. Therefore, the Government will have no option but to reduce expenditure on health and education.
Furthermore, the Government will just be forced to increase the incidences of tax rate to maintain and maximise tax revenue, so the buck stops at you, as the multiplicity of negative multiplier effects is endless.
About windfall:
(i) A windfall profits tax is unfair and unbalanced. Why not tax the windfall profits of the richest men in Zambia instead, who have made tremendous profits off the Zambian consumers? If we are going to punish people for making money, why not be fair about it and put a windfall tax on the richest Zambians first?
(ii) Many participants in this debate seem to be unaware of the thousands of small royalty interest owners who depend on a modest mining income for their livelihood. A blanket windfall profits tax would create hardship and put many of these small royalty owners into an income tax rate bracket higher than 50 per cent.
(iii) All Zambians can participate in mineral profits through the public stock markets, every Zambian citizen is free to invest in hundreds of publicly traded companies and become partial owners of these companies.
(iv) Mining companies do not control the price of copper or the market for copper. The copper produced by the Zambian based mining companies is a small fraction of the worldwide supply. If you are angry about copper prices you can lobby the Zambian Government to go after CIPEC and strengthen up the cartel.
(v) A windfall profits tax is anti-investment, and goes against the principles of personal property and capitalism that we have pursued.
(vi) A windfall profits tax will hurt hundreds of thousands of employees in Zambia’s mining industry. These people could lose their jobs due to layoffs as a direct result of the windfall profits tax.
(vii) Windfall tax contributes to treasury on average of about less than one per cent of revenue from the mining industry. This is much less than what Government collects from dividends, mineral royalties, corporate tax and personal income tax of mining industry.
(viii) A windfall profits tax will hurt mining investors as it is against the principles of equity taxation and it is tantamount to double taxation.
