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Ghana’s e-levy is unfair to the poor and misses its income goal: a lesson in cellular cash tax design

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In Might 2022, the federal government in Ghana launched a deeply unpopular tax on cellular cash transactions, referred to as the e-levy. When it was launched, the levy was structured as a 1.5% cost on all digital and cellular cash transactions over 100 cedis per day.

The e-levy was designed to boost more cash for the federal government by extracting bigger tax contributions from Ghana’s casual sector. About 90% of complete employment in Ghana is casual and politicians have explicitly stated that the e-levy is focused on the casual sector.

In January 2023, the federal government reduced the rate of the tax from 1.5% to 1%. The distinctive characteristic of the levy, an exemption threshold for transactions beneath 100 cedis a day, is predicted to be removed however stays in place for now, though it’s actual worth has been eroded by inflation over the previous 12 months.

The levy’s effects – on Ghana’s public funds, its poor, cellular cash utilization –have been on the centre of intense and polarising public conversations, a lot of it with out empirical foundation.

In September 2022 we introduced some early results from a survey of two,700 self-employed casual sector operators, carried out simply earlier than the introduction of the e-levy, the place we confirmed the probably impression of the tax on Accra’s casual sector.

In our recent paper we assess how casual sector operators within the nation’s capital Accra use cellular cash. We additionally requested the views of casual staff on what they considered the e-levy’s pending implementation.

Our findings counsel that the e-levy is extremely regressive. In different phrases, our information present that the bottom incomes casual sector operators pay a bigger share of their earnings in the direction of the levy than greater earners. We additionally present that the majority casual staff disapprove of the e-levy.

Our findings counsel that the federal government ought to rethink the design of the e-levy to make sure that essentially the most susceptible staff within the casual sector are protected. We propose additional that the exemption threshold for low worth transactions is a vital instrument on this regard and must be retained for the sake of fairness.

Decrease fee brings reduction

What does the lowered fee of 1% imply for casual staff? In our latest examine, we analysed data on the usage of cellular cash transactions amongst casual sector operators in Accra. We divided casual sector operators into 5 equal teams (quintiles), primarily based on their reported earnings. Earlier than the decrease fee of 1% was launched in January 2023, we calculated that e-levy funds would quantity to about 4% of reported month-to-month earnings for the bottom incomes quintile. The tax would quantity to lower than 1% for the 2 highest incomes quintiles.

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This reveals that the levy takes extra from the poorest. And the bottom earners pay a considerable portion of their already meagre earnings in the direction of the levy.

The decrease fee brings a small diploma of reduction for the bottom earners. When the brand new e-levy fee (1%) is mapped onto our survey information, the bottom incomes quintile would pay about 3% (as a substitute of 4%) of their month-to-month earnings in the direction of this tax, all else remaining equal.

Threshold an vital instrument for the poor

If the protecting threshold have been to be eliminated–according to the recent budget statement–the bottom incomes quintile would pay, on common, 7% of their month-to-month earnings in the direction of the e-levy. In different phrases, even on the new decrease fee, the removing of the exemption threshold would greater than double the legal responsibility of the poorest casual sector operators.

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The switch threshold due to this fact seems to be an vital instrument for safeguarding the bottom incomes operators, no matter the speed at which the levy is about. However as a consequence of inflation, the true worth of the brink, as of January 2023, has been eroded by greater than 50%. In different phrases, the brink is now solely half as efficient at shielding the poorest because it was to begin with.

Subsequent steps

As cellular cash taxes acquire reputation throughout the continent, their design requires very cautious consideration. At present there are a minimum of ten African countries which might be both contemplating, or have applied, an identical tax.

Our analysis means that efforts to guard the poorest cellular cash customers (usually the unbanked working within the casual sector) must be the precedence. We additional argue that Ghana’s use of a protecting threshold is a vital characteristic of the coverage design–extra vital than, for instance, merely reducing the speed–however that it doesn’t go far sufficient to guard the poor.

Extra essentially, we replicate on the effectiveness of the tax from a income perspective. The brand new tax measure has carried out rather more poorly in income phrases than the federal government had hoped for. In first 8 months of the levy’s introduction, it raised solely 11% of its revenue target of US $1 billion.

It’s due to this fact value asking what else the federal government can do to fulfill its urgent income wants. There’s substantial evidence that specializing in greater earnings earners, together with excessive web value people and extractive industries, could be notably productive. The event of a unit within the Ghana Income Authority that focuses on rich people is a promising step on this course, although the outcomes of those efforts stay to be seen.

The expertise of the e-levy to this point presents vital classes to different international locations contemplating related taxes. Among the many most vital is that home useful resource mobilisation can’t be achieved by over-taxing the livelihoods of essentially the most susceptible staff within the casual sector.