Source Of Liberia's Revenue: Consumers Tax And, Or More Debt

The Perspective
Atlanta, Georgia
May 2, 2013

If Liberia is to maintain the fragile peace and spur economic prosperity then the government cannot continue to rely on consumption tax and, or more debt. However, the announcements from a Liberian lawmaker, President Ellen Johnson Sirleaf’s economic adviser and the chart below indicate that Liberia might be in trouble.

LIBERIA BUDGET 2008/9 2009/10

A few weeks after the Liberian Senator, Mr. Isaac Nyenabo announced that his Senate Committee has discovered a half billion-dollar debt that President Ellen Johnson Sirleaf government did not disclose to lawmakers and the general public, the Finance Minister declared that there was shortfall in projected revenue. The news of the shortfall in projected revenue was not a surprise since the government has and continues to make frequent adjustments to its revenue since 2006 - the government's annual budget grew 400% from $80 million to $400 million in 2011.

Part of the reason they’ve had to make frequent adjustments is because a significant portion (67%) of the projected revenue is based on consumption tax; a tax revenue that does not only fluctuate as consumer spending goes up and down, but also increases the cost of living.

However, while Liberians have whispered about the reliability of the projected revenue, the supposedly hidden $500 million debt was a different issue. It was a surprise since many people have been rejoicing over the news of the cancellation of the onerous $4.7 billion dollar debt. Now, the question is, did President Sirleaf make up the shortfall in revenue projection by borrowing money? Borrowing money to make up for the shortfall in projected revenue might be a good story, but let us look at why government is relying on an additional cost to consumers to pay high salaries

What are the components of Government Revenue, excluding grants, debts or donations? Government's core revenue = its Share from the profits of the natural resources + Tax levied on Business profits+ Royalty Fees + Payroll Tax + Real Estate Tax + Consumption Tax + Tax on Export.

Current Liberia Core Revenue= Payroll Tax (37.1) + Tax on Business (26.1) + Tax on Real Estate (1.3) + Consumption Tax (42+88) + Tax on Others (13)

Since 2006 through 2011, Liberia has received about 13% (26.1/197) its revenue from Firestone, Mittal Steel, Diamond, and Gold, while it received 67% from consumption tax. Shifting the tax burden from a country’s share of its resources to involuntary taxation (consumption tax) is not limited to Liberia. In America, Public reports say the Federal government owes trillion of dollars all because it borrowed money to make up the shortfall in projected revenue. Why?

Just like Liberia, the US government does not receive any share of the profits from its natural resources since the US government has zero shares in corporations. To add salt to injury, the government collects only about 26% in taxes from the $1.75 corporate profits, made in 2011, for example, but collects 80% of its revenue from personal income tax and payroll tax. (James Livingston, Professor of History at Rutgers University; NY times, April 15, 2013). And to make up the shortfall in its revenue projection, the US borrows $2 trillion dollars from China, a country that earns revenue from its resources.

Added to Liberia in West Africa, Sierra Leone and Ghana do not receive revenue from their natural resources, therefore, consumption tax made up about 50% of their government revenue. On the other hand, Nigeria, with a percentage of ownership, collects about 62% revenue from its share of the profits from oil.

Had Sierra Leone, Ghana or Liberia received any reasonable share of the profits from its natural resources and tax corporate profits at a reasonable tax rate, maybe, consumption tax would have been lower, and harsh economic pain wouldn’t been inflicted on the poor. So, if additional revenue from natural resources would help in preventing instability, why aren’t many countries getting some profits from their natural resources? Profiteers are de facto Owners.

Conflict of ownership of country’s resources between multinational corporations such as Firestone or Bong Mines and nationalists was settled long ago. Sadly, profiteers won. How? Three things: Ideology, Falsehood, and Money were responsible. Theory: proponents of capitalism say give individuals the freedom to own and manage land, diamond, oil, iron ore, gold, etc. and profits will trickle down because the competitive instinct of mankind will reduce corruption and enhance productivity. Falsehood: chief executives, who earn excessive salaries and offer bribes in exchange for sweet heart deals and lower tax rate, are less greedy than the recipients of bribes (lawmakers and government’s bureaucrats).

Bureaucrats at the highest level of government such as Patrice Lumumba of Congo Republic and Kwame Nkrumah of Ghana who questioned the theory of individualism (i.e., capitalism) were bribed or ousted from power. Nkrumah said among many of his warnings, that individualism (i.e., capitalism) will always exploit and widen the gap between the poor and the rich. In Liberia, President William V. S. Tubman did embrace capitalism. And how much revenue did Liberia get by transferring the ownership of its diamond, gold, iron ore, etc. to big business? Minuscule royalties. Oops! Liberian officials, to keep the citizens pacified, got crumbs from one of the unkindest forms of exploitation.

After winning the war about ownership of resources and having failed to trickle down corporate profits, investors want another bounty. Wait a minute, without a high tax rates, is there any other method to trickle down corporate profits? Or to put it another way, wouldn’t a lower tax rates keep corporate profits from trickling down? Proponents of the concept of a lower tax rates say ownership of resources is not enough. They want fewer regulations and a lower tax rates in order for big business to invest and create jobs. New regulations coupled with high tax rates would bankrupt big business and create adverse economic conditions, not only for big business, but also for society, they argued.

Again, profiteers are winning the new conflict. Why? Money. Chief executives use money to influence lawmakers and the public. Ironically, the money used to buy lawmakers and concerned parties is generated from a country’s lucrative resources such as diamond, oil, iron ore, etc. With lawmakers in the pockets of investors, corporate tax rate is on the decline, of course that means minuscule government revenue.

Therefore, governments are not only receiving minuscule share of the profits from the natural resources, but governments are also receiving little or zero tax revenue because of lower tax rate. With minuscule revenue emerging from big business, governments are compelled to collect significant portion of their tax revenue from individual income tax, payroll and consumption tax (tax that increases the cost of living). And when consumption tax revenue is insufficient to finance the needs of society, governments borrow onerous debt, a recipe for instability.

J. Yanqui Zaza

© 2013 by The Perspective
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