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Opinions of Saturday, 1 April 2006

Columnist: Amegashie, J. Atsu

Taxing Remittances

I woke up this morning to learn that the government of Ghana is considering a policy to direct a percentage of private remittances (by individual Ghanaians in the diaspora) into government chest. According to a Daily Graphic article (read), this TAX is ??. to enable the Government to meet the expenditure of providing social amenities and infrastructure that come with developments such as housing.?

Presumably, the government has no plans of taxing remittances that are intended for pure consumption. These are remittances for our parents, brothers, sisters, etc who suffer to make ends meet. The tax is to be levied on remittances intended for investment projects like houses. Of course, it is not always clear that a house is an investment good or a consumption good. How will the government clarify this distinction? And how will the government determine whether a given transfer is intended for the construction of a building?

In any case, I am against this tax. Let me argue my case. Remittances for projects like housing already attract indirect taxes via the value added tax (VAT) on the building materials purchased for such projects. In addition, once the house is completed, annual or periodic property taxes have to be paid. What is the government using this tax revenue for? Furthermore, the money transfer companies like Western Union pay corporate taxes.

A counter argument is that a person who lives in Ghana also pays property taxes and VAT on building materials. But in addition, s/he pays income tax. Diasporean Ghanaians do not pay income taxes. Herein lies the difference between the tax obligations of a domestic Ghanaian and a diasporean Ghanaian, who are both prospective home owners in Ghana. However, there is also a difference in the benefits of public goods and social infrastructure that these two groups of Ghanaians enjoy. The domestic Ghanaian uses the roads, police protection, the courts, public hospitals, subsidies on petrol, etc much more often than the diasporean Ghanaian. Therefore, there is no compelling reason why the diasporean Ghanaian and the domestic Ghanaian should bear the same tax burden. And no such argument can be made on redistributive grounds based on the apparent higher income of diasporeans. Indeed, the diasporean Ghanaian pays taxes in his/her primary country of residence and typically faces higher prices as well. The middle and upper class domestic Ghanaians arguably have a higher standard of living than the average Ghanaian diasporean.

To be sure, some of the main beneficiaries of these houses and capital projects are the relatives (i.e., domestic Ghanaians) of the diasporean Ghanaians. These domestic Ghanaians pay income taxes.

Finally, one cannot ignore the fact that remittances shore up the economy and stabilize the local currency. This further weakens the argument that the diasporean Ghanaian does not pay income taxes and therefore must be taxed on remittances.

In principle, a government can use the coercive power of the state to tax anything. But in practice, it shouldn?t. And higher taxes can paradoxically reduce government revenue (google Laffer curve). Mr. Kuffuor and the NPP government, please leave remittances alone!!!! The VAT and property taxes are enough. Is there a Leviathan in your neighbourhood?

J. Atsu Amegashie
Department of Economics
University of Guelph Canada

Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.