About me.

Andrew M. Mwenda is the founding Managing Editor of The Independent, Uganda’s premier current affairs newsmagazine. One of Foreign Policy magazine 's top 100 Global Thinkers, TED Speaker and Foreign aid Critic

Sunday, July 8, 2018

In defence of social media tax

Why taxing mobile money and social media is a politically revolutionary act that may help improve our democracy
 Since government introduced a tax on mobile money and social media, there has been deafening opposition to it from every quarter of Ugandan public opinion. Yet for economic and political reasons this is the most revolutionary tax decision this government has ever made. What is even more intriguing is that those making the loudest noise against it are equally that section of our society which actually pays the least taxes.

Ugandan elites are always demanding that the state delivers a large basket of public goods and services – healthcare, education, clean water, electricity, good roads, railways, security, etc. to all citizens for free or very cheaply. Whence does the state get revenues to perform these functions other than by taxation? Even if/when it borrows to pay for these services, it has to generate revenue from taxes to pay back its creditors.

The ratio of tax revenues to the Gross Domestic Product (GDP) in Uganda is very low, at 14%. Why? First because the state’s tax administration infrastructure is very thin on the ground. Secondly, the state has a very limited economic map of the population to collect taxes from it. Thirdly a huge part of economic activity is informal, making it difficult to tax. Fourthly, many economic activities in this country are tax-exempt. Fifth, the government has always been afraid of the political backlash from taxing its people and this explains its predilection to borrowing. Indeed given the hullabaloo over this tax, I am afraid our government may panic and withdraw it.

It is true our government lacks a plan for broadening the tax base. This has led tax policy to always seek to extract the last penny out of a few existing and compliant taxpayers instead of bringing more people and activities under the tax bracket. The better strategy should be to increase productivity so that more taxes are collected from increased output. And quite importantly, government has no strategy for creating incentives to attract people from the informal to the formal economy so that it can tax them.

But be that as it may, the tax on receiving and sending mobile money and on social media is good because it makes very many people pay direct taxes. The new tax is impossible to evade and expensive to avoid. It is collected electronically, making it easy and cheap to administer. Mobile phone companies become collection agents for the state, which can easily monitor the activities on their network. There is, therefore, no need to hire more staff and build more elaborate infrastructure for tax collection.

Secondly you can only avoid this tax by not consuming the service. Its demand is inelastic because alternatives cost many times more. If you decline to use mobile money to send money to your mother in Katakwi in order avoid this tax, the cost of taking it in person is much higher. The inconvenience of looking for a person who lives near your mother, to take it there for you is too much, not to mention the risk of it being stolen.

The use of social media for texting and voice calls has reduced government revenues from Short Message Services (SMS) and voice calls. This tax is, therefore, one way to compensate for this. If anyone uses social media to earn money, surely they should pay a tax on their income. And I don’t see a problem with government using this tax to penalise those who use social media for lugambo and to hurl insults at others.

The great advantage of this tax is that is spreads the net widely thereby bringing many more Ugandans into the tax ambit. About 236,000 individuals with businesses are registered to pay taxes in Uganda. Yet only 24,600 actually pay taxes and a miniscule 4,150 pay 80% of it. The people who do not want to pay taxes are also the same people who vehemently oppose government borrowing and yet always demand more and better public goods and services from the state.

For far too long, the government of Uganda has been reluctant to tax the vast majority of its citizens for fear of a political backlash, like the one we are seeing today. Hence for many years it relied heavily on the generosity of its Western benefactors through foreign aid. However, when Uganda passed the Anti-homosexuality Act in 2012, most aid was cut. Rather than cut spending and/or increase taxes, government went borrowing on the domestic market and also turned to China on the international credit market.

Before 2012, government used domestic borrowing for monetary policy i.e. to control money supply. After the aid cuts, government began borrowing from the domestic market for fiscal purposes i.e. to finance the budget. This has led domestic debt to rise to Shs12.5 trillion in 2018 with interest payments costing Shs1.9 trillion this financial year. Yet the very Ugandans denouncing government for imposing this tax have been the same people denouncing it for increasing debt.

Secondly, domestic borrowing crowded the private sector out of the financial markets. This discouraged private investment leading to the sluggish growth of the last five years – from an average of 7.2% in the 20 years between 1993 and 2012 to 4.1% in the last five years. Indeed by increasing the return on treasury bonds, interest rates for private firms skyrocketed causing many companies to default on their loans and some to go under.

There are many problems – both economic and administrative – with the new tax. But regardless of the weaknesses, I think it is good. Its biggest inefficiency (charging senders and recipients of mobile money and asking people on social media to pay the tax directly instead of deducting it from their airtime) is actually its greatest advantage – from a political point of view. Because many Ugandans are being taxed directly, they are now feeling the pinch. It is very likely that (holding many factors constant) they will now become more vigilant in holding government to account to serve them than they have ever done.

For far too long, the government of Uganda had avoided making citizens pay for the public goods and services they demand and get by relying on aid. This disarticulated the state from citizens and made donors the most important influence on public policy. Now that the state is seeking to rely on citizens for revenue, the opportunity for engaging them in public policy making and implementation has a chance to improve. This may contribute to consolidating our democracy.

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