Derek Francis argues against bringing in high levels of income
Finance Minister Sam Rainsy is attempting to centralize and massively
increase the government's taxation base through new laws instituting a 20
percent corporate profits tax, and a 30 percent personal marginal income tax for
annual earnings over $8000. Wager earners getting between $4000 and $8000 will
be slugged with 20 percent taxation, while 10 percent will be taken from annual
earnings of between $400 and $4000, under the proposals.
look unnervingly similar to the tax regimes in many Western countries, which
evolved over many decades. Striving for redistributive ideals is not in itself a
bad thing, but to move so fast, without reference to the country's rudimentary
institutional framework and tiny economic base, may be dangerous. In fact Rainsy
himself appears unenthusiatic about instituting the reforms - the main pressure
is coming from the International Monetary Fund and lawyers who stand to make a
boon from the tax avoidance industry.
Western countries can only now
pursue lavish taxation regimes because their GDP is huge. Importantly, their
wealth only evolved from minimalist taxation while the economy was in its
infancy, just as Cambodia's is now. Private sector GDP is not now big enough to
sustain taxes that would allow the government to even start effectively
providing needed infrastructure and basic social services.
destroy Gross Domestic Product and as taxes increase the rate at which GDP is
destroyed goes up by its square. Thus for example if a 5 percent tax destroys
$25 million of GDP, a 30 percent tax will destroy $900 million in GDP -
approximately two fifths of the Cambodian private sector economy!
However there is much evidence to suggest the taxes will be largely
avoided. Cambodia is mainly a cash economy in which no contracts are signed, no
records are kept and there is no registration of workers' incomes, this largely
unorganized community would have no problems dodging income tax.
harder to track are the many families who engage in barter trade, such as the
farmer who tills a small paddy of rice and trades some of it with their
neighbors fruit crop. However, the honest young entrepreneur who sets up a small
textile factory could be caught by the taxman. The dishonest entrepreneur who
sets up a similar factory could, of course, easily pull the wool over the
taxman's eye with false records and the connivance of his staff. In turn he
would thus have little trouble in driving out honest tax-encumbered competitors.
The underground economy and black marketeering would grow rapidly.
Cambodia's big business, medium-level manufacturing and
internationally-competitive industries, such as tourism, would struggle to
legally avoid the tax.
These powerful business groups may unite with a
common purpose to impede Rainsy. By a common economic rule of thumb the
institution of his tax reforms would devalue their income generating assets by
about one third.
If backed into this kind of corner Cambodia's bigger
businesses might back any clandestine movement seeking to overthrow the
government as well as bribing tax-inspectors and faking
Further, new immoral industries spearheaded by lawyers would
sprout, with the sole aim to assist business avoid tax. The government lacks the
requisite control of the public service to competently combat tax
The net effect of a large personal income and corporate profits
tax would be that it would place an unfair and disproportionate tax burden on
companies conducting their affairs by the book, which are more important to
ecomonic growth. The taxes would provide them with strong incentives to become
corrupt. The taxes would not discourage inefficient or dishonest companies to
If Cambodia wishes to grow it must reverse these incentives -
encourage business and encourage unproductive farmers to join the urban economy.
Foreign investors would struggle to legally avoid, and be highly
sensitive to, a tax increase. Cambodians have been perhaps
ultra-nationalistically paranoid over foreign entrepreneurs making 'quick'
investments which allegedly plunder the economy and make huge profits through
the sweat, and at the expense, of Cambodians.
The government cannot
think it can tax such profits, and give the wealth created from such investments
to the Cambodian people, without destroying the incentive to invest.
other principle beneficiary of foreign investment is, of course, Cambodia
itself. The country gains much needed modern infrastructure. The value of land
and the income streams which flow from it increase exponentially. Employment is
generated, skills and knowledge are passed to Cambodians.
Over the next
few years we may expect some investors, probably foreigners, to make 'quick'
obscene profits due to the uneven, inconsistent and thin spread of information
in Cambodia. Importantly, the investments made will generate as much benefit as
longer term projects through the dissemination of knowledge through society. The
investors should not necessarily be disparagingly viewed as 'cowboys'. In fact
Cambodia desperately needs such people who have, or can acquire, this very
scarce and uncertain information about profitable ways to generate wealth in
It was the spirit of these 'cowboys/entrepreneurs' which
led to historically unparalleled growth and wealth in nineteenth century
America. Given their high mobility, and the inhospitable environment, at the
first whiff of a major tax most of these 'cowboys' would leave. If there is no
rebate given for corporate tax these entrepreneurs will face an effective tax
rate of 44 percent, higher than most Western countries!
foreign volunteers "with a calling", would be affected to a lesser degree by the
new taxes, and would probably stay. However some would argue they generally do
more harm than good.
The government does need money, where should it
come from if not from higher income taxes? Cambodia is fortunate in that offers
of untied foreign aid have flooded in. Why not use this to fund the public
sector and the provision of public goods?
Further, there is great
potential to increase fiscal revenue through targeted consumption taxes on
specifically, cigarettes, alcohol, petrol, brothels etc. These taxes are easy to
administer and cause little detriment to the economy.
could dramatically reduce military spending. by lobbying the UN for an
international peace keeping force to be redeployed in the gray areas to hold the
Khmer Rouge at bay.
Increasingly Western governments realize major tax
reform is a quasi-constitutional process - it cannot be done without the support
of business groups, trade union leaders and workers. That community debate,
consultation and discussion - the consensual approach has not happened is
evidence of the impoverished nature of the political economy in Cambodia.
Indeed, in most Western countries election campaigns revolve primarily around
party's proposed tax and expenditure plans. It is time Cambodia had such open
debate. Without it, the government lacks any mandate to engage in significant
tax reform; and the public will continue to feel it is legitimate to employ
underhand methods to protect their property from taxation.