Less is more: Lessons for our tax structure

“Less is more” is an expression frequently used to express the view that a minimalist approach to artistic or aesthetic matters is more effective. The phrase is often associated with the architect and furniture designer Ludwig Mies Van Der Rohe (1886-1969), one of the founders of modern architecture and a proponent of simplicity of style. The notion being that simplicity and clarity lead to good design.

Closer to home would be the influence of Steve Jobs’ philosophy. In his words: “That’s been one of my mantras – focus and simplicity. Simple can be harder than complex…simplicity is the ultimate sophistication. It takes a lot of hard work to make something simple …to be truly simple, you have to go really deep … you have to deeply understand the essence of a product in order to get rid of the parts that are not essential”.

My interest though is the commercial aspect. “Less is more” might not be a concept explicitly set out in economics textbooks – but it is implicit in certain economic concepts; not least the concept of price elasticity of demand, which refers to the sensitivity in demand for a good (or service) as compared to changes in price. So, where demand is very elastic then a change in price can cause a disproportionate change in demand – for example, if a price increase results in a disproportionate demand decrease, then the value of sales decreases as compared to if there had been no price increase. In such a case “less [price] is more [revenue]”.

This concept is well understood in the context of “luxury” consumer goods on which excise duty is charged (such as alcohol, tobacco, soft drinks), and then VAT on top of that. Ideally, excise duty on these goods would be adjusted annually for inflation – but in recent years (including this year’s budget, with the exception of spirits) this has not been the case. Why? A recognition that the consumer wallet is strained and therefore any increase would probably result in an adverse overall revenue impact once the knock-on effects of any demand reduction for these discretionary purchases are considered. Less is more!

However, in practice our tax structure frequently disdains the concept of “less is more”, instead preferring to start from the premise that “more is more” as evidenced by a multiplicity of taxes and high tax rates. Our employment taxes are a good example of multiplicity (with 4 percent skills development levy (SDL), 0.6 percent workers compensation fund (recently reduced from 1 percent) on top of the usual Paye and social security contributions) and high rates as highlighted in a recent study by the International Labour Organisation titled “A Review of Skills Levy Systems in Countries of the Southern African Development Community”. This study noted that the average of training levies in the selected Sadc countries was 1 percent of payroll costs, and that “in terms of levy rate, the outlier is the United Republic of Tanzania” (with a SDL rate then at 4.5 percent, now at 4 percent). Fewer employment taxes and lower rates could mean more compliance and competitiveness. Less is more!

Another example is telecommunications. In its March 2021 report (Tanzania: Driving social and economic value through mobile-sector tax reform) the GSM Association commented that “the tax contribution of the mobile sector in Tanzania is considerably higher than the average for sub-Saharan Africa and also above other regional averages; this could limit the country’s transition to a digital economy”, noting that the 17 percent excise duty rate on mobile services is the second highest in Sub-Saharan Africa. It highlighted that “in Tanzania, consumer taxes represent a significant share (32 percent) of the total cost of mobile ownership (TCMO)”. Lower taxes on telecommunications might mean growth in subscribers, investment and collections. Less is more!

A constant refrain from tourism relates to multiplicity of taxes. The World Bank in its January 2015 Tanzania Economic Update mentioned the taxation structure for tourism as one of the factors holding back the sector from realising its potential. The theme of that update was “The Elephant in the Room: unlocking the potential of the tourism industry for Tanzanians”. Citing a Big Results Now (BRN) study, it stated that “tourism operators are subject to more than 20 taxes and fees” and expressed concern at “complexity of the system”, noting that “the unclear and uncertain tax system also creates barriers to entry for new and small investors … this reduces the opportunity for a viable tourism sector and decreases its overall level of competitiveness”. In summary, fewer taxes and fees would result in a more vibrant tourism industry. Less is more!

The challenges are no different for the oil and gas sector. A September 2017 report titled ‘Negotiating Tanzania’s Gas Future: What Matters for Investment and Government Revenues?’ by the Natural Resources Governance Institute (NRGI) concluded that “imposing the stricter fiscal terms contained in the 2013 Model Production Sharing Agreement (2013 MPSA) and more recent changes to the generally applicable regime would significantly reduce the likelihood of investment”. A September 2019 NRGI update noted that the 2013 MPSA and recent legislation impose a much higher tax take than other African gas producers”. In a nutshell, it highlighted the risk of a “more is less” outcome.

The NRGI expressed similar concerns in a January 2019 report on mining. It noted that at a multi-stakeholder meeting held that month on the mining sector, the President the late Dr Magufuli “stated his government’s intention to review the 2017 fiscal regime given his concern that the recent increase in taxes is hindering rather than helping efforts to collect more revenue from the sector. While the media focused on his comments on artisanal and small-scale mining and tax evasion, the president also spoke about the impact of the new regime on large-scale investment”. The report continued that “NRGI’s preliminary analysis of the current fiscal regime for Tanzania’s mining sector suggests that the president is right to be concerned”. At the time it had modelled a 74 percent average effective tax rate for a gold project using certain assumptions. Again, a risk of a “more is less” outcome.

“Less is more” is also the general counsel on family planning, if economic outcomes are to be optimised. However, the World Bank’s February 2021 Tanzania Economic Update highlighted that “rapid population growth has hindered progress on poverty reduction” noting that “Tanzania’s population growth rate is around 3 percent, the 12th highest in the world, above LIC [low income country] average and more than double the LMIC [lower middle-income country] average of 1.4 percent”. Indeed, a broader concern is the risk that such population growth rather than being a demographic dividend (generating ever-increasing demand and economic activity) instead creates a demographic time bomb (if there is insufficient economic activity to engage the youthful population).

While many while away time discussing all kinds of perceived external threats (real or imagined) to the country, the biggest threat is internal in terms of unoccupied youth. Against this background, the priority should be to prioritise a tax structure that encourages maximum economic activity.

What to do with the tax system? Well, let’s reflect again on Steve Jobs counsel “to get rid of the parts that are not essential”, or of the legendary Marie Kondo (see YouTube) and her ruthless application of the “less is more” philosophy to wardrobe management. Can we adopt a similar mindset in revisiting our tax structure? Less is more!

David Tarimo is Country Senior Partner at PwC Tanzania