Economy in a week: Taxing the rich
 
 

Egypt’s Minister of Finance announced ongoing negotiations on a five percent exceptional taxation for wealthy individuals over three years, in a bid to increase state revenues.

Running out of options and stripped of cash, Minister Hany Kadry said his government is studying the prospects of implementing this scheme for a temporary period of two or three years, adding that it makes economic sense to broaden the tax base rather than merely increase taxes.

Progressive taxation was stipulated in Article 38 of the of the recently passed Constitution, stating that, “Taxes on individuals shall be progressive and shall have multiple levels according to ability to pay.”

In a press conference on Wednesday, Kadry said the idea would be proposed to the Cabinet. There was no mention of what he meant by “wealthy individuals” at the time, although later during a TV appearance he mentioned a figure of LE1-1.5 million.

Currently, those earning above LE250,000 a year are taxed at a rate of 25 percent.

It is difficult to assess how much return might be gained from the initiative, especially with a legacy of ineffective tax collection, commented Mohamed Abu Basha, economic researcher at EFG-Hermes. “The tax base mainly depends on salaries from registered companies. However, much of the informal sector is not included.”

He clarified that the “informal sector” is not necessarily the impoverished sector of the economy. On the contrary, it can include businesses that make profits in the millions, but do not officially register with the government, avoiding using invoices as well as tracking and monitoring from the authorities.

Practically speaking, because of the sheer size of the country, tax authority offices have few leads on business profits, and in turn, businesspersons have little fear of being audited. This creates little, if any, incentive for businesses to file their records for taxation.

With such a dysfunctional and inefficient tax collection system, the proposal may seem like more of an attempt to appease public opinion calls for social justice, than an efficient and practical way to generate direly needed revenue for the government.

A similar scheme introduced in July 2011 raised corporate taxes for companies that earn over LE10 million. However, the issue of ineffective tax collection remained, and tax figures increased modestly.

“It’s about widening the tax base rather than increasing taxes,” said Abu Basha during a phone interview with Mada Masr.

The idea of taxing the rich was brought to the table several times prior to 2011, and more frequently after. Among the few wealthy executives advocating for the idea in the past is Hassan Heikal, former CEO and board member of EFG-Hermes, and son of the prominent writer Mohamed Hassanein Heikal.

Hassan Heikal published a piece in late November 2011 for the Financial Times titled “A Tweet from Tahrir Square — time to tax the rich.” He suggested imposing a one-off global tax of 10 to 20 percent on “individuals with a net worth in excess of US$10 million, with tax receipts going to their country of citizenship.”

Wealth or property tax may be described as having progressive effects as it increases the tax burden of higher income families and reduces it for lower income families.

He aspired that through doing so, governments would be able to reduce their public debt, which in turn would allow them to reinvest in infrastructure, research and other means of providing the unemployed masses with jobs.

Six months after, during a TV interview, Heikal said that the tax base is not inclusive of the ultra wealthy, in his opinion, where they do not pay more than 1-2 percent of their annual income. Meanwhile, the majority of Egyptians pay between 18-20 percent, which is deducted directly from their salaries.

This legal loophole in the tax law enables wealthy individuals to be exempt from tax on profits made through company dividends or capital sales on the stock market. In other words, the allocation of company profits to its shareholders has zero percent tax, and the mark-up made on sales of stock market companies is not taxed.

“The tax system is flawed,” Heikal said. The tax itself needs to be progressive according to income-brackets, going as high as 25 or 28 percent, while the Tax Law itself needs be inclusive of dividends and profits made on the stock market.

Abu Basha says it is imperative to tax dividends, seeing as this is how company owners generate the bulk of their income, compared to their modest taxable salaries.

Last week, Heikal made an estimate based on figures from Forbes and a Credit Suisse report saying that a tax on wealth must be implemented “in a country where 50 million people are below the poverty line and 50 people possess a wealth of US$50 billion dollars, all made in the country without paying taxes.”

Many developed and developing countries have established tax wealth and progressive taxation as a means of attaining social and economic justice.

In China, for example, the tax brackets under the progressive tax system range from five percent for the poorest citizens to 45 percent for the country’s elite.

Kadry affirmed the matter in a recent interview with London-based Asharq Al-Awsat newspaper, saying that tax rates in many countries range between 35 to 50 percent.

Minister of finance takes action on tax collection, sets realistic economic expectations

Last week, the Minister met with the heads of tax collection offices across Egypt, affirming the importance of competent tax collection to fund government spending on public services.

In his first press conference since assuming his position, Minister Hany Kadry said last Wednesday previous ambitions for achieving the official target of 3.5 percent GDP growth are farfetched. With the country undergoing a prolonged period of political turmoil, he set the bar lower, predicting the economy to grow at a rate of 2-2.5 percent.

GDP growth in 2013 recorded 2.1 percent, while dropping to one percent in the first quarter of 2014.

Former Prime Minister Hazem al-Beblawi, who abruptly submitted his resignation in late February, was rather optimistic about the state of the economy, as well were his estimates at reaching a budget deficit of 10 percent of GDP.

Kadry said he expects the deficit to stand between 11-12 percent by the end of the current fiscal year. In his first press conference after assuming his position, he said the government plans to reduce the deficit to two percent of GDP through fiscal restructuring, the first steps of which will take place next year. He did not clarify any details, although he said the plan would be publicized shortly.

Government debt and increasing debt service

With little development on economic growth and state revenues, the government has been increasingly borrowing from local banks.

The CBE reported that total public debt reached LE1.651 trillion by December 2013, with 84 percent appropriated by government debt, which increased by LE126 billion in the six months leading up to December.

Although government debt to GDP, currently at 84 percent, is within acceptable levels compared to international standards (UK at 88 percent, US at 101.6 percent), there has been a staggering increase in debt service. In the six months to December 2013, debt service stood at LE143 billion, a 95-percent increase from September’s figure of LE73 billion, according to Ministry of Finance figures. The figure exceeds total debt service for fiscal year 2012.

To put these figures in perspective, debt service amounts to 62.5 percent of total government spending between July and September 2013, while total public investments received a mere 13 percent in the same period (this includes investments on commodities, production services, and social services such as housing education and health).

Arab states extending a lifeline until September, maybe October

Furthering their strategic allegiances with Egypt’s army-backed government, Arab countries will extend petroleum aid until at least September. This month marks the end of summer, when energy consumption soars.

“Arab aid for petroleum products offered to Egypt will continue until next September or October,” Kadry told Reuters.

Though power shortages are a direct product of insufficient natural gas resources, the problem is also a result of underdeveloped infrastructure. Booming demand has led to significant pressure on Egypt’s power grid.

As a result, the government has been attempting to shift most of the new industrial and mega real estate projects to seek power supply from private power sector developers.

According to a recent energy report, electricity consumption increased from 104,400 GWh to 138,300 GWh between 2007 and 2012, at an annual compound growth rate (CAGR) of 5.8 percent.

This piece was updated on 17 March, 2014 at 5:47 pm

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Sherif Zaazaa 
 
 

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