The 2018 Mid-Year review proposed an additional 35 per cent top marginal rate for taxpayers under the Personal Income Tax (PIT) regime. While this has become the main attraction, we note that the bill to amend the Income Tax Act, 2018 (Act 896) repeats an important downward adjustment in the five per cent and 10 per cent brackets, which took effect with the 2018 budget itself (see table 1).
It is necessary to note that PIT is paid by (a) employees on salaries and allowances; and by self-employed persons and partners on profits. In essence, the PIT paid is a non-corporate business tax from the perspective of these latter two taxpayers.
Whilst the proposed new 35 per cent top marginal rate makes the new PIT appear progressive—as is also the case with the increase in personal exempt threshold from GH¢2,592 to GH¢3,132—it is important to take note of the regressive nature of the downward adjustment for low-income
Ironically, the bands for the 17.5 per cent and 25 per cent are increased (from GH¢33,180 to GH¢33,720 and from GH¢28,850 to GH¢81,108 respectively).
This will worsen the regressivity of the overall tax regime since the taxpayers in these two categories are likely to be middle-income and high-income earners.
Tax burden on sample of incomes
Table 2 uses a sample of incomes to calculate the tax burden under the existing PIT regime. It shows the PIT payable under the existing regime for each band for the sample income levels. The Effective Tax Rate (ETR) is calculated by dividing the total tax paid by the total annual income earned.
Table 2: PIT payable under Existing Regime
We now perform the same calculations in Table 3 for the new PIT regime proposed in the Mid-Year Review and the Amendment Bill.
Table 3: PIT payable under Mid-Year Proposals
Comparison of F2017 and F2018 regimes
Table 4 compares the tax payable and effective duty rate for the existing and new PIT regimes.
Table 4: Comparison of existing and new proposals
1. Progressivity and redistribution: It is obvious that our tax regime is losing its redistribution effect. This is a key economic principle for even market economies, where low-income-earners get reasonably high personal exemptions. In Ghana, we have sought to achieve this by setting a goal of exempting the minimum wage from tax, by equating it to the personal exemption limit.
2. Bracket or band size: A similar redistribution goal underlies the five per cent and 10 per cent bracket. Hence, the reduction in the Mid-Year proposals, rather than upward adjustment of the bracket (as with the zero bracket), seriously offends that rule. The main effect of a reduction, unreasonable band-size, and lack of frequent upward adjustment is “bracket creep”.
In the current Mid-Year proposals, burdensome low-income earnings are being forced instantly into a higher bracket: that GH¢1,296 less GH¢840 equal to GH¢456 is moved from the five per cent to the 10 per cent bracket.
3. Equalising CIT and PIT marginal rates: As noted earlier, the PIT for self-employed persons and partners is a business tax. Hence, Ghana set a deliberate goal from the 1990s of equating the top marginal PIT rate with the corporate Income Tax (CIT) to prevent the shifting of the tax base. Hence, for a long time, this was achieved at 25 per cent.
The 35 per cent rate may be high for sole proprietors and partners as business tax and make their entities non-competitive. This could result in reclassification of personal benefits as business costs (and deductible) to reduce profit. Examples include fuel as business expenses and registration of luxury cars in the name of business entities.
4. Middle-class burden: Another phenomenon that GRA was charged to correct is sharp increase in income from about 1,800 (even lower at the proposed 1,200) to about GH¢38,000. This has huge revenue benefits but constitutes a huge burden for the middle-class. A very large amount of their incomes are catapulted into a higher 17.5 per cent (previously 15 per cent) bracket and higher effective rate.
These are not exhaustive discussions of our tax policy but it appears we are being driven by the revenue consideration at the expense of the efficiency and equity principles or rules. While this is not new, we should not worsen it with contemporary decisions. This could affect productivity, tax evasion or avoidance, and competiveness of the economy.
As we noted, the only income category that benefits from a low tax impact are those who earn incomes below the PIT exempt threshold, a level of income that does not attract any tax rate. The steepest increase in effective tax rate (ETR) hits taxpayers within the existing 25 per cent and the new 35 per cent categories. Clearly, a case can be made for a review of rates, possibly in the 2019 Budget, to remove the regressivity associated with annual incomes at very low levels under the five per cent and 10 per cent income categories.
The writer is a Former Minister of Finance