Several corporations, banks, and businessmen in Egypt have sponsored philanthropic initiatives to collect funds to cover the medical equipment necessary to confront the novel coronavirus and support irregular workers, self-employed professionals, and small businesses harmed by the pandemic-related economic slowdown. These initiatives were positively received by society and the government, but they raise urgent, legitimate questions about the fairness of the tax system, compelling us to rethink government revenue and spending and search for economically effective, long-term alternatives to finance government expenditure and commitments during the current crisis and beyond.&nbsp;
<h3>State measures to increase tax revenues</h3>
In recent years, the government has instituted several measures to increase tax revenues and expand the tax base; including implementing a VAT and a tax on self-employment. Recently, the government approved a bill to amend the income-tax law to raise the standard exemption from EGP7,000 to EGP22,000 and create a new tax bracket of 25% for persons with annual income over EGP400,000 (Eissa, 2020). By the end of fiscal year 2019/20, the state aims to increase tax revenue to EGP856.6 billion, up from EGP759.9 billion the previous year (Finance Ministry, 2019).&nbsp;
These measures have helped to reduce the budget deficit as a percentage of GDP, but they have not yet reduced the total deficit. Tax revenues as a percentage of GDP remain low in Egypt compared to the global average, other North African economies like Tunisia, Algeria, and Morocco, and several other African states (OECD, 2019; Miller et al., 2020). In turn, the substantial gap between government revenue and spending persists, and is frequently financed through public debt. Debt service is therefore one of the biggest obstacles to deficit reduction,&nbsp; sufficient spending levels to meet the challenges of COVID-19, and increased spending on health and education services in line with government targets, World Bank recommendations, and constitutional requirements. While the primary budget surplus (before interest) in the second half of 2019 came to 0.5% of GDP, the overall deficit including debt service totaled 3.5% (Reuters, 2020). The Finance Ministry anticipates that debt service will account for more than one-third of government spending and eat up nearly half of state revenues in 2019/20 and 2020/21 (Finance Ministry, 2019).&nbsp;
Alternatives are therefore urgently needed to increase tax revenue and reduce the reliance on public debt, in order to increase spending on health, education, and the challenges posed by the coronavirus.&nbsp;
<h3>Other opportunities to increase tax revenues</h3>
I posit four proposals for discussion and consideration by stakeholders and decision makers.&nbsp;
Firstly, a new income tax bracket for high earners should be created, tailored to target income representing a high rate of return on investment. While it is expected (and hoped) that small and micro businesses will earn a high return on investments, their relatively small net income will place them in a lower tax bracket. In contrast, large corporations and individuals with exceptionally large profit margins should be subject to a higher tax bracket (more than 35%)&mdash;for example, companies and individuals earning profits of more than EGP5 million with a return on investment over 50%. (The rate of return on investment could be linked to the Central Bank of Egypt&rsquo;s interest rate). This proposed tax would not apply to the vast majority of economic activities in Egypt, particularly labor-intensive industries and agriculture, but it would levy a reasonable tax on real estate brokers, imported goods, and monopoly markets. A very high rate of return on capital investment typically reflects high profit margins resulting from some sort of monopoly or a reliance on low-wage labor. It may also be linked to real estate speculation, where high prices do not reflect real demand for housing or the cost of a unit with labor costs factored in. The common objection that a high tax rate will deter investment is misplaced here because it is difficult to imagine many other investments that offer investors a return of 50% in one year in other countries. In any case, we should reconsider the type of investment we wish to attract and encourage.&nbsp;
Secondly, the tax on real-estate transactions&mdash;currently 2.5% of the value of the sale&mdash;should be replaced with a real-estate gains tax. This tax would apply only to the profits made from the sale of the property (real estate or land) rather than the entire value of the sale. In this case, the rate should be linked to the brackets laid out in the income tax law. The tax will only apply to property sales if the transaction yields a profit&mdash;that is, if the sale price is higher than the estimated value of the asset. Value assessment will not constitute a challenge because property is already appraised for the purpose of collecting property taxes. Capital gain taxes on real-estate transactions are assessed on profits made from such transactions in many countries, either through a separate tax or as part of an income tax. In some states, such as Germany, they are assessed only on properties held for less than ten years (Deloitte, 2020). Along with the current real-estate taxes, the proposed amendment would curtail market speculation, which harms individuals who need housing but cannot afford it due to excessively high property prices. Real-estate speculation involves purchasing properties as an investment rather than for residence, which inflates demand and prices, leading to distortions that do not reflect a real need for housing rather than as a savings or investment vehicle. Capital invested in real estate speculation could be better directed to productive economic activities that produce services and goods needed by Egyptians that are currently imported, thus compounding the trade deficit.&nbsp;
The third proposal is not new: existing tax brackets should be reconsidered and additional brackets created for high earners&mdash;for example a bracket for those making EGP10&ndash;50 million and another for earnings over EGP50 million&mdash;to bring the tax rate up to at least 35% for high incomes. One need not cite tax rates in Scandinavian countries and other European economies to support this tax hike: the highest income tax rate is 38% in Morocco and 35% in Tunisia, and similar rates are in effect in many African economies (Miller et al., 2020). The government&rsquo;s proposed amendments are a positive step&mdash;a rate of 25% on annual income over EGP400,000 is reasonable&mdash;but they are not enough to meet spending requirements for health and education. Healthcare and education currently consume a high proportion of total household spending in Egypt (about 15%) and this percentage increases with income, especially in urban areas (CAPMAS, 2019). Increasing tax revenues and subsequently government spending on health and education would help families to save money that would otherwise be spent on these services, improve the quality of services, and increase the numbers of people who benefit from them. Many middle- and high-income households would in fact have higher net incomes if they paid more in taxes to fund free government education and healthcare, instead of paying out of pocket for lower quality in the private sector, as they do now.&nbsp;
The fourth and final proposal is to apply the capital gains tax. The tax has now been deferred three times in order to support the stock market from the economic fallout of COVID-19. A relatively minor tax compared to the income tax, it is a fair tax on income and is applied in many financial markets. Moreover, it is still unclear how policies that support and incentivize financial markets are effective in driving economic growth and employment, and the benefits of exempting capital gains from taxes just like other economic profits remains similarly uncertain. Financial markets should reflect the strength of the real economy, not the reverse. In other words, the rule should be to stimulate the real economy, which would then have positive secondary effects on financial markets. In any case, the economic utility of tax exemptions remains controversial.&nbsp;
Like all other policies, these proposals should be studied using economic models and detailed data to determine their utility and impact on tax revenues and the overall economy. In general, however, we need initiatives and ideas to increase tax revenue&mdash;for example, by taxing companies with branches domiciled in tax havens&mdash;in a way that reflects the size of the real economy, secures society&rsquo;s right to a share of the profits made using its resource and labor, and ensures a fair distribution of economic returns. Corporate and individual philanthropy will remain inadequate to this task. In fact, such philanthropic gestures often serve to absolve high earners of society&rsquo;s claim on their wealth, allowing them to make a show of sacrifice and generosity in order to avoid legitimate, critical questions about the fairness of the tax system.&nbsp;
<hr>
References
<ul>
<li>
Central Authority for Public Mobilization and Statistics. (2019).&nbsp;<a href="https://www.capmas.gov.eg/Pages/StaticPages.aspx?page_id=7183">Key income, expenditure, and consumption indicators</a>&nbsp;(Ahamm Mu&rsquo;ashshirat Bahth al-Dakhl wa-l-Infaq wa-l-Istihlak). [In Arabic].
</li>
<li style="font-size: 10pt;">
Deloitte. (2020).&nbsp;<a href="https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-germanyhighlights-2020.pdf">International tax: Germany highlights 2020</a>.
</li>
<li style="font-size: 10pt;">
Eissa, A. (2020, April 16).&nbsp;<a href="https://akhbarelyom.com/news/newdetails/3033579/1/%D8%A7%D9%84%D8%AD%D9%83%D9%88%D9%85%D8%A9-%D8%AA%D9%88%D8%A7%D9%81%D9%82-%D8%B9%D9%84%D9%89-%D8%AA%D8%B9%D8%AF%D9%8A%D9%84-%D9%85%D8%B4%D8%B1%D9%88%D8%B9-%D9%82%D8%A7%D9%86%D9%88%D9%86-%D8%A7%D9%84%D8%B6%D8%B1%D9%8A%D8%A8%D8%A9-%D8%B9%D9%84%D9%89-%D8%A7%D9%84%D8%AF%D8%AE%D9%84">Government approves amendment to income-tax law</a>&nbsp;(al-Hukuma Tuwafiq &lsquo;ala Ta&lsquo;dil Mashru&lsquo; Qanun al-Dariba &lsquo;ala-l-Dakhl).&nbsp;Akhbar el-Yom. [In Arabic].
</li>
<li style="font-size: 10pt;">
Finance Ministry (2019).&nbsp;<a href="http://www.mof.gov.eg/MOFGallerySource/English/PDF/General-Framework-FY2019-2020.pdf">General framework of the draft state budget for fiscal year 2019/20</a>.
</li>
<li style="font-size: 10pt;">
Miller, T., Kim, A.B., &amp; Roberts, J.M. (2020).&nbsp;<a href="https://www.heritage.org/index/?version=62">2020 index of economic freedom</a>. The Heritage Foundation.&nbsp;
</li>
<li style="font-size: 10pt;">
Organization for Economic Cooperation and Development. (2019).&nbsp;<a href="https://www.oecd-ilibrary.org/taxation/revenue-statistics-in-africa-2019_5daa24c1-en-fr">Revenue statistics in Africa 2019: 1990&ndash;2017</a>.&nbsp;
</li>
<li style="font-size: 10pt;">
Reuters. (2020, January 20).&nbsp;<a href="https://www.reuters.com/article/egypt-economy/update-1-egypts-debt-ratio-to-beat-target-this-year-minister-says-idUSL8N29P24V">Update 1: Egypt&rsquo;s debt ratio to beat target this year, minister says</a>.
</li>
</ul>

آراء

Commentaries

الضرائب