Africa And Aboriginal Tuesdays: E-Letter To Orla Ryan and BBC RE: "The burden of Uganda's business tax" (January 14, 2003)
Your recent article, "The burden of Uganda's business tax" though informative, really doesn't help the reader understand why Uganda's local fiscal policies are as counter-productive as they are. It is articles like these, which abound in the Western media that make it so easy for non-Africans to conveniently chalk up the economic woes of African nations to a mixture of corruption, ignorance and savagery. If only the historic record permitted such a convenient and self-serving judgement. To understand the problem you really have to at least go back to the time period just before and right after Uganda's independence in October, 1962. Certainly, the current tax structure of the nation of 23 million is onerous and generally unproductive. Anyone can see that. But you leave out the historical context of the two biggest reasons as to why things are that way - the nature of the colonial and ethnic segmentation juxtaposed to the evolution of political administration in the area; and the difficulties for taxation posed by Uganda's overwhelming self-employed agrarian-oriented population.
Although you may not enjoy it, you should primarily blame the British and three colonizers, among others, Sir Harry H. Johnston, F.R. Kennedy and Mr. C.A.G. Wallis for setting the stage for Uganda's fiscal nightmare. It was the British government and these three men, possibly more than any others, that altered the balance between central and local government in the area of what would become the nation of Uganda, laying the base of the political and administrative structure that would severely limit the growth of the baby nation and its ability to collect taxes and foster economic growth. Britain's arrangement with the dominant Buganda kingdom and eventually others like the Ankole, Bunyoro and Toro, through treaty of protectorate, resulted in the Baganda tribe (which has a Diaspora outside of Uganda today) and the Buganda kingdom being the heart of the area's economy, with its 1 million members or 16% of the country by 1960. Britain's de facto division of the Baganda from the other tribes and uniquely "granting" it large tracts of freehold land is what set the stage for the skewed economy that would find the Buganda economy - twice the size of the next largest Iteso tribe - disproportionately developing, gaining in economic strength as other tribes and regions grew weaker, through very narrow British economic planning. The central area of the Buganda and Busoga became home to the early introduction of cash crops like cotton and coffee into the agricultural system. This market dwarfed that of any other part of what would become Uganda and drew people, from the scattered and remote parts of Uganda, to the towns of Kampala and Jinja - home of some of the largest sugar estates. Soon, the migrant workers from the other regions overwhelmed the "indigenous" farmers and more and more labor poured into the central region depressing wages. Of the 8% that lived in the country's urban areas, 65% of them lived in Jinja and Kampala. But this expansion initially met a political and administrative approach to governance that was handled skillfully by the Baganda tribe, after colonization. If you look at some of the earliest and most authoritative writings on the time you will see that British leaders like Lord Luger (formally Capt. Luger) and others were thoroughly impressed with the Kabaka (King) of Buganda and the kiganda administration and opted to allow the efficient system to continue without much interference.
However, that changed when The British commissioner of Uganda in 1900, Sir Harry H. Johnston began to work out arrangements with Bugandan chiefs, whereby they were granted land, jobs in the colonial administration, and a great measure of autonomy in half of the land in Buganda territory in exchange for levying taxes. On orders that came straight from Britain, Sir Harry H. Johnston with the Bugandan chiefs as principal tax collectors, instituted a gun tax, hut tax and poll tax. The natives had never known anything quite like it. With the British backing them, the Baganda began to overwhelm other tribes and kingdoms and in many cases imposed more than just taxes, at the direction of the British, on others.
A few decades later a District Commissioner, F.R. Kennedy introduced a superficial system of popular representation with leaders elected "indirectly" through a maze of county, sub-county and parish bodies in different districts. The practice further divided the soon-to-be country and undermined the best of its tribal and monarch-character that still gave the growing area (in terms of population and economic activity) unity and a basic but familiar system of organization. It is here that the colonial effort arbitrarily developed tax collection efforts that it uniformly spread to other areas of the Protectorate, with county, sub-county and parish levels all having the authority to collect taxes.
The system of taxation and political administration got more complicated when Mr. C.A.G. Willis of the Colonial Office prevailed in Britain and Buganda with his arguments that the African system of local government was inferior and that it needed a more British character if the area would ever become an independent nation. His vision, embodied by ordinance further devolved power into the hands of district councils, charging them with the responsibility for local services like education, healthcare, roads, and other forms of community development and he mandated that these and other council services would be paid for by local taxes. As more and more people were leaving remote and scattered areas for economic opportunity and seasonal work in other regions - wage and self-employed - district councils and local governments were being granted more authority to levy taxes. The greater burned of taxation, across the country, fell upon a less productive and smaller population of self-employed farmers.It was the "Willis Policy" that broke the back of the local African system and which established the multi-layered local-dominated system of taxation - where every part of a business transaction is taxed by some authority or other - that dominates in Uganda today. You should have raised the issue of where the council you mention in your second sentence came from.
In addition to not indicating this important political aspect of Uganda's history, you forgot to deal with the difficulties presented by Uganda's unique physical makeup. 34% of Uganda's land is arable, by far one of the highest percentages on the entire continent of Africa. This economic condition meant that the majority of the country, 40 to 50 years ago was involved in farming, specifically, small peasant plots dedicated to cotton and coffee crops. The enforcement of tax collection is made extremely difficult in any community that is scattered widely and self-employed in seasonal cash crops. Generally speaking there are primarily three areas available to governments for taxation, 1) production and consumption 2) income and 3) property. Economically developing countries tend to be dependent upon indirect taxes on production and consumption – sales taxes, import duties and excise taxes because they are easier to collect and assess. Income taxes are problematic because of the time-sensitive nature of cash crops, and the difficulty in assessing the income of every single member of the economy. In Uganda's case, the agrarian economy so dominates that wage-earners are in the distinct minority and found usually only in the country's relatively few urban areas, though heavily concentrated. Property taxes are difficult to collect because they require titles to assets and the assessment, valuation and revaluation of productive and non-productive land. Uganda, due to the lack of education and tribal customs that hindered the valuation and assignment of property rights (according to the preferred Western system), could not rely upon this form of taxation to bring in considerable income.
As a result, Uganda relied upon indirect taxation to raise badly needed revenue. In the economically developing world it had plenty of company. In 1968 indirect taxes represented 77% of India's tax revenue and 80 per cent of Ghana's revenue. By comparison, the United States and Germany, in the exact same time period depended upon indirect taxes for only 21% and 37% of their tax revenues, respectively.
But as is the case, with nations seeking to climb the ladder of industrialization and higher levels of tax revenues, indirect taxes never satisfy. And although Uganda did have the plethora of local governments, that in theory are best suited to property taxation; it did not have the necessary accompaniment of assessors, titles to land, assets, securities and contract law that work a viable system of taxation. And, it had a legacy of a complicated, overlapping system of taxation from the colonial period that increasingly empowered layers of local governments to collect taxes from a shrinking human capital pool while it underidentified and underdeveloped a rich physical capital base.
So it eventually turned to income. But of all of its East African neighbors, namely Tanzania (today) and Kenya, in particular, Uganda was in the worst position to collect income tax. It had, post-independence, over 1,250,000 farmers and traders scattered all over the country, in an area just under 100,000 square miles. And these were to have their taxes collected by 6,000 tax collectors of little education and poor means of transportation. The country also erred when it instituted a graduated income tax that was a "slab" system where individuals were made to pay a fixed amount in each bracket as opposed to a proportional percentage. This meant that the tax was regressive within brackets and in between them. Tax collection occurred in the lower brackets at a rate double that in the higher brackets and within rates, taxes were collected from the bottom portion at a 10 to 15 percent higher clip than those at the top rate.
Individuals at the maximum of each bracket, found that if they were to earn one shilling more they would have to pay as much as 50 shillings more in taxes on income. It represented a disincentive to earn more in many cases, and the result was hidden transactions and decreased production. Individuals, if they were to pay taxes, would have to cleverly negotiate contracts that would land them just perfectly along the graduated system. Employees and employers lacked the interest and at times, sophistication necessary. Many opted out of the system altogether. From 1958 to 1969 the number of people who actually paid the graduated tax rose from just over 1,300,000 to just over 1,500,000, an increase of 15%. But the country's male population (taxes were loosely applied to women) rose from just under 1,800,000 to just under 2,500,000, a rise of 40%. This meant that percentage of males paying taxes in Uganda fell from 74% to 61% from 1958 to 1969.
In addition, applying the income tax on farmers proved to be especially difficult due to the seasonal nature of their income. Uganda was operating on a 6-month collection system, but the question of when, within this time period to collect was problematic. Cotton farmers tended to earn their income in winter months and by winter's end may have already spent their intake, on a variety of causes - personal and business-oriented. And this problem had to be placed opposite that of the landless wage-earner who found employment at varying times of the year and earned relatively little over a longer time period. The 6 months collection period that may have worked for a peasant farmer did not work for them.
It is also important to consider that Uganda has had a difficult time in assessing and collecting taxes from migrant workers from Rwanda and Burundi, who performed seasonal work and would return home with wages. They would enter the Buganda territory and work. The British did not address the issue of taxation on these workers who helped the economy of what would become Uganda to grow, but did not remit taxes to the area. Yet their presence demanded the provision of basic social services by the local governments, according to the British system.
Where were these governments to get the tax revenue that was needed, especially when so much of the population is self-employed? Like any developing society, indirect taxes on trade and commerce are heavily relied upon. It is this type of taxation that you highlight in your article.
What I have presented is just some of the real context in which your article is written. Volumes of course could be written on the points I have raised. Uganda is still struggling with the basic question of who should pay taxes, who should assess them, who should collect them, how to enforce them and how to assess them among the majority population of self-employed. These questions were never properly addressed by the British who for decades, guided the people in this region of Africa, every step of the way in economic planning and political administration.
While your article is justified in pointing out how cumbersome the country's system of taxation is for businesses, it could stand to do a better job of doing so outside of a vacuum. A paragraph or two of context would show that your subject is not only a problem that Uganda had help from Britain in creating, but one that local governments within economically developing nations are still wrestling with all over the world.
Uganda's policies reflect the excruciating difficulties of moving from a system of indirect to direct taxation and from a system of centralized to local government; more than they demonstrate a simple, ignorant, or willful embrace of oppressive fiscal policies placed upon its impoverished population to no aim.
Your writing leaves the latter impression instead of the former.
Tuesday, August 22, 2006
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