Taxes have long been a fundamental tool for governance and societal development. In the 18th century, taxes were primarily levied on goods and services, such as excise duties on commodities like salt, candles, and beer. These taxes were often used to fund wars and other state expenses. By the 20th century, the scope of taxation had expanded significantly, with income and corporate taxes becoming central to government revenue. This shift allowed for more direct funding of public services and infrastructure to support economic growth. Now in the 21st century, globalization has further transformed taxation. Countries now rely heavily on taxes to mitigate the effects of global competition on local production and to fund critical areas like infrastructure, education, and healthcare. This has made taxation a crucial tool for sustaining economic growth and addressing social needs.
In Africa, taxation has been a key driver of economic growth, providing essential revenue for development projects and public services. However, it has also been perceived as a burden due to high tax rates and inefficient systems. Increased government spending and inadequate infrastructure have equally exacerbated public skepticism about the effective use of tax revenues. This duality has made taxation both a vital resource and a contentious issue, as governments strive to balance revenue generation with public trust and economic efficiency.
As Africa looks to deepen trade relations with international partners and work towards total independence from the dollar as a reserve currency for its own forms of exchange, the continent faces a balancing act between building its resources to compete with the world, uplifting a populous to access basic necessities, and maintaining a state of order in the changing wake of democracy in a continent where approximately 75% of the population is aged under 35, and tax is the factor that could tip the scales in Africa’s decided shift towards economic growth or stagnation.
Keynesian theory, developed by British economist John Maynard Keynes during the 1930s, advocates for increased government expenditures and lower taxes to stimulate demand and pull economies out of recessions. However, in a free market economy, this approach often faces challenges. Free markets rely on the self-regulating nature of supply and demand, and over the years government intervention has become a favorite tool of choice which many economists argue has caused distort the market. Historical examples, such as the backlash against high taxes during the embargo of the 1970s in the United States, illustrate how increased taxation can lead to economic stagnation and public discontent.
Raising taxes is often seen as a quick solution to counter economic challenges like inflation. However, imposing higher taxes is now sometimes seen as a remedy worse than the ailment itself. While higher taxes can increase and enable the government to provide public goods and pay off its share of deficit spending, the opposite effect is a reduction in disposable income, a dampening of consumer spending, and a slowdown in economic growth.
The top five economies, South Africa, Egypt, Algeria, Nigeria, and Ethiopia are estimated to bring in $1.45 trillion in 2024 accounting for 51% of the continent’s total GDP. Driven by an emerging middle class and an increasing share of ultra-high network individuals, this cohort is facing mounting pressure similar to advanced economies in the rest of the world, especially in the wake of rising asset prices. The adverse impact of higher taxation to offset government spending over time risks inhibiting growth by reducing the ability for the middle class and businesses to purchase and invest in assets, create goods, and generate economic value. This, in turn, stifles the nation’s growth per capita.
We believe that a strategic increase in taxes could facilitate governments to generate substantial revenue if a substantial amount is pledged towards Public-Private Investment Partnerships (PIIPs), Public-Private Partnerships (PPPs), and Joint Ventures (JVs). In recent years, a growing trend has occurred where African governments have sought to take charge of their projects through these initiatives to boost their share of revenue and drive economic growth.
Zambia a noteworthy example, recently finalized the acquisition of a 51% stake in Mopani Copper Mine, a move expected to increase copper production to 200,000 metric tons within the next three to four years and enhance cobalt production, contributing to higher revenues. Among other private and public partnerships are Kigali City, a $300 million dollar investment designed to position the city as a technological hub and foster innovation, Ethiopia’s $1.8 billion pledge on the Modjo-Hawassa Expressway, which aims to enhance trade routes and stimulate economic growth in the East and Southern African corridor, and Ghana’s launch of several renewable energy projects through PIIPs to increase its renewable energy capacity to 10% of its total energy mix in the next six years.
These investments could enable governments to provide essential goods and services, facilitate intercontinental trade, and strike a trade balance with the West, ensuring that the continent is not at a disadvantage in trade relationships. The local and foreign inflows generated can then be re-allocated to build emerging cities where new industries can take hold, thereby creating jobs, stimulating economic growth, and enhancing the overall quality of life for citizens, but only if effectively managed and invested.
As national debts continue to rise, the fiscal flexibility of many nations will be hampered in the quest for investment in critical infrastructure and social services. The complex task of developing tax policies that can address the numerous challenges posed by globalization and the increasing weaponization of financial systems will require a careful approach that avoids unintended consequences such as those witnessed in Kenya and Nigeria just recently, while maintaining market efficiency and economic growth. Furthermore, shifts in global reserve currencies, and the growing relevance of regional currencies, add an additional layer of complexity, as these changes can affect the stability and predictability of African financial systems.
To navigate these challenges, African countries will need to focus on progressive taxation, to ensure an equitable distribution of the tax burden while reducing income inequality and raising essential revenue. Expanding the tax base through the formalization of the informal sector and improving tax compliance could further boost revenue without the need to raise existing tax rates. Additionally, well-designed tax incentives can attract foreign direct investment (FDI), but they must be carefully balanced to avoid eroding the government’s revenue base.
The pressure of globalization also necessitates the addressment of tax evasion and avoidance. Strengthening international cooperation and adopting global standards, such as the OECD’s Base Erosion and Profit Shifting (BEPS) framework, can help curb these practices. Most importantly, as the digital economy grows, African nations will need to ensure their tax policies are adapted to capture revenue from digital transactions or risk a capital flight to districts where the cost of capital is lower.
Another growing concern is the potential weaponization of the financial system. To reduce their vulnerability to external shocks, African countries will need to diversify their reserve assets and rely less on a single reserve currency. Strengthening regional financial cooperation and integration will also help create a buffer against global financial volatility and enhance collective bargaining power. When designing these policies, it will be essential for nations to factor the unintended consequences, namely, market distortions and civil unrest particularly in economies where the cost of living is already reaching its limits. Maintaining a balance between generating revenue and fostering economic growth will help ensure market efficiency. Additionally, transparent and accountable tax systems are crucial for building public trust and ensuring that tax revenues are used effectively to support development goals.
Africa is on the brink of a new era, with immense potential in critical minerals, healthcare, trade, and consumerism. To fully harness this growth, tax policies will need to be strategically aligned to support, rather than hinder, progress. Thoughtful tax systems may generate the revenue needed for infrastructure, healthcare, and education, while also fostering a business environment that attracts investment and ensures the benefits of growth are widely shared.
For individuals and businesses, tax reforms present both challenges and opportunities. Staying informed about changes in tax policies will be crucial for making well-informed decisions and adapting to new regulations. Effective financial planning, with the help of tax advisors, will help mitigate any negative impacts and ensure compliance with the new rules. At the same time, these reforms may open fresh investment opportunities, particularly in sectors primed for growth, encouraging businesses to align their strategies with national development goals.
Engaging with policymakers and advocating for fair, growth-oriented tax policies will also be key. If we all actively take interest and participate in the reform process, we play a part in helping shape policies that promote economic development while positioning ourselves to benefit from the new opportunities ahead. As Africa navigates this transformative period, well-designed tax policies will be vital in driving sustainable growth and shared prosperity across the continent.
Elishama is Arielle’s Chief of Client Relations, A marketing professional with a background in business consulting and financial services. He endeavors to bridge the gap between marketing, finance and technology. As an avid music lover, he enjoys discovering musical gems and keeping tabs with global and macro-economic affairs.
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