Wednesday, 20 June 2012

Critiquing the proposed Tax increase in Alternative Shadow Budget

By Alykhan

I gladly welcomed the Alternative Budget 2012/13 proposed by Shadow Finance Minister Hon. Zitto Kabwe which amongst other things aims to increase development spending, reduce recurrent expenditure and drastically increase government revenue (from 8.7 trillion to 11.9 tril) a whopping 36% more! This is going to be achieved by a combination of cutting tax exemptions to sectors such as mining and telecommunications and raising the Pay As You Earn (PAYE) income tax. I support his brave attempt at changing our long held attitudes regarding our country's budget, that we are destined to accumulate debt and rely heavily on foreign donor support. The government should strive towards raising its own funds to finance the growth of Tanzania, and with the GDP growing at a rate of close to 7%, it should be able to raise significantly more revenues.

The new proposed rates are as follows


That being said, I still have a number of reservations about exploiting PAYE as a revenue stream. The proposed PAYE tax hike includes a top rate of 42% for those earning 10 million and 38% for those earning more than 3.2 million. This undoubtedly will affect a very small percentage of Tanzanians who are lucky to earn this much. This will include top surgeons, CEOs of companies, people with PhDs, engineers and other professionals. My worry is that these professionals are highly mobile, and unlike say business owners, can easily move to a different country where their skills are in demand. In this globalized age, it has become very easy for people to migrate to a different country, one that perhaps has better social services than Tanzania. Furthermore, young professionals deciding to move to Tanzania may be discouraged by such a high taxation rate. Other countries  (with their top bracket tax rates in brackets) such as Canada (30%), New Zealand (33%), South Africa (40%) and even our neighbours Kenya (30%) who are by the way recruiting qualified people in a big way, have lower income taxes and yet provide more social services. That's why I feel that imposing a 42% tax rate may cause people to leave our shores for greener pastures while Tanzania suffers from the brain drain.

Secondly, as laid out by the Shadow minister above, the rate at which different earning brackets are charged for PAYE may cause unfairness for certain people. For example take someone earning 3,000,000 under the above scheme. They will take home 2,149,500. However, if they got a raise of 200,000 shs and are now in the next tax bracket (earning 3,200,000) they will take home 2,067,600! That raise of 200,000shs actually becomes a loss of 100,000shs! Now you may think this is a mathematical trick but its not. Its the way in which the PAYE system and the base tax amount (the amount added to the % calculated) is structured. We propose an alternative which will remove this irregularity (for a more dramatic example calculate the tax rate for 9,999,999 and a raise of 1shs to 10,000,000. You pay about 360,000shs less in taxes after you get your 1shs raise!)

Here's our alternative:

Using this method, we get the following:

As you can see, using our method we get a more realistic calculation of taxes which are still higher than current PAYE rates for salaries above 3,200,000 shs making it more progressive and fair compared to that suggested in the Alternative Budget. With these small changes suggested by Uhuru Blog, Mr Kabwe can strengthen his proposal of increasing PAYE as means of cutting the budget deficit. However, we still maintain that proper studies be done before adopting this increase in PAYE to make sure we dont have talented and educated professionals leaving our country.

Comments are welcome, working together and debating we can find a solution to our debt crises!


  1. 9,999,999 and a raise of 1shs to 10,000,000>>this is not correct, you get significant rise in taxes, in fact your will shoot by more than 520,000

    an increase in income by tsh 1 will attract an increase in taxes by more than 520,000 #NotCorrect!

    rember it will now be 500,000 + 42% in excess of 3.2! again in excess of 3.2

  2. I dont know whose tax plan you are correcting. The shadow budget now has a different proposal for PAYE increase (the first figure in this article). According to this You get the following

    For 9,999,999: (9,999,999-720,000) X 38% + 190,000 = 3,716,399
    For 10,000,000: (10,000,000-3,200,000) X 42% + 500,000 = 3,356,000

    A decrease of 350,000 when you increase by 1shs

    Our rates are a bit different:
    For 9,999,999: (9,999,999-3,200,000) X 38% + 856,500 = 3,440,499
    For 10,000,000: (10,000,000-10,000,000) X 42% + 3,440,500 = 3,440,500

    1shs increase in pay results in 1sh increase in tax!

    I hope that clears things up