Tax the informal sector, push for tax equity — Prof. Abor

Professor of Finance and Dean of the University of Ghana Business School (UGBS), Professor Joshua Yindenaba Abor, has thrown weight behind the call for a broadened tax base and the need for equity in the domestic tax administration system.

Speaking to the B&FT on the side-lines of discussions about an ESID research on promoting socio-economic transformation in Accra, he argued that the informal sector, for instance, is one area that can be tapped to boost tax revenue.

He said: “Equity here means you don’t burden the few but rather expand the tax net to cover a broader part of the system. We should look at the informal sector, which hosts a number of businesses that are evading tax; we need to capture that aspect as well.”

Tax experts and economists have made incessant suggestions to the country’s tax administrator—the Customs Division of the Ghana Revenue Authority (GRA)—to broaden the tax base, rather than over-taxing large corporate businesses in the country.

And according to Prof. Abor’s explanation, the problem with the existing approach going into the future is that the perceived “big businesses” may find it difficult to plough back their profits into investments.

“If the current tax administration is targetting only the large corporates, then there is going to a problem soon; it may affect the ability of those larger businesses to plough back their profits because a lot of their gains will be going into taxes,” he said.

Ghana has a tax to Gross Domestic Product (GDP) ratio hovering around 17-18 percent, which is half of what developed markets achieve—with some countries having a tax to GDP ratio of 34 percent.

“This,” according to the astute economist, “is not due to huge tax rates, but because such economies have in place an effective and efficient tax system that allows them to collect taxes from almost everybody.”

Prof. Abor also indicated that apart from increasing tax revenue, fast-tracking national social and economic development will equally hinge on prudent spending of tax revenue as well as government’s ability to seal system leakages.

He added: “We need efficiency in the tax system; when you have a tax system in which there are leakages, and we have monies going into private pockets, then of course the system is going to lose out.

“Once we are able to plug loopholes in the tax system, and we are also prudent with our spending, we can preserve more for social and economic investments. I think we have huge potential to increase our tax revenue, but the biggest problem has to do with the limited coverage and system leakages.”

Prof. Abor further highlighted the need to strengthen the domestic financial market, as research has shown that economies with strong financial markets can attract more interactions to spur growth.

“FDIs are very important, but we need to encourage that by also strengthening the local financial market because research has shown strong financial markets are able to attract interactions to spur growth.

“There are some innovative schemes that can be used to promote private sector development: including structured trade finance, project finance and the important role of development finance institutions,” he noted.

The discussion on the country’s transformation agenda was organised by the University of Ghana Business School (UGBS) in collaboration with the Institute of Statistical, Social and Economic Research (ISSER), and the DFID-funded Effective States and Inclusive Development Research Centre (ESID) on the theme ‘Ghana’s Quest for Social and Economic Transformation: Challenges and Prospects’.