By Burnett Munthali

Tonse Alliance Government has increased Malawi Revenue Authority target for 2024 financial year and Malawians are expected to be beaten below the belt even harder than before. This article looks at the general impacts of tax increase very closely in order to understand and highlight more about the shocks likely to be felt by every citizen as we go to Canaan.

Changes in the tax codes influence the decisions people make about whether and how much to work, how much to save for retirement, and where to live. Taxation also affects how entrepreneurs organize their businesses, how much to borrow and invest, and where they locate the businesses they create. Tough times are not over yet in Malawi, they are still coming. Tighten your belts !

Taxation

First of all, tax is an increase in the amount of tax that people and companies are obliged to pay. In order to avoid high interest rates substantial tax increases would be needed. Tax changes have very large effects: an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent. Changes in the level of taxation affect the level of economic activity. Reductions in income tax rates affect the behavior of individuals and businesses through both income and substitution effects. The positive effects of tax rate cuts on the size of the economy arise because lower tax rates raise the after-tax reward to working, saving, and investing.

Secondly, just to understand something, there are two main economic effects of a tax: a fall in the quantity traded and a diversion of revenue to the government. A tax causes consumer surplus and producer surplus (profit) to fall. Lower tax rates increase the demand for assets as well as the supply of labor. The economy responds with lower interest rates, higher employment, higher investment and faster economic growth.

However, we must all realize that tax is important and Malawi cannot do without it at it is the engine of government in order to function. Taxes provide revenue for central, federal, local, and state governments to fund essential services–defense, highways, police, a justice system–that benefit all citizens, who could not provide such services very effectively for themselves.

Thirdly, the four most used tax bases are individual income tax, corporate income tax, sales tax, and property tax. The two most common types of taxes are: 1) Income tax—A percentage of generated income that is relinquished to the state or federal government. 2) Payroll tax—A percentage withheld from an employee’s pay by an employer, who pays it to the government on the employee’s behalf to fund Medicare and Social Security programs.

Fourthly, there are three biggest sources of tax revenue. About 50 percent of federal revenue comes from individual income taxes, 7 percent from corporate income taxes, and another 36 percent from payroll taxes that fund social insurance programs (figure 1). The rest comes from a mix of sources. Unfortunately, Tax abuse substantially reduces government tax revenues and weakens the integrity of our tax system and the efficiency of our economy. Thus, distinguishing between tax planning and tax abuse is critical.

Conclusion

In conclusion, Malawi Revenue Authority (MRA) is geared to increase its tax collection target as millions of Malawians will be pushed to the extreme edge after a 44% devaluation of the local currency was recently effected in November 2023. Government awarded 10% salary Increment to civil servants which they protested against and were later given 15% while some companies ordered their employees a 30% salary Increment. Other companies have not effected any salary increment and there is nobody to speak nor fight on their behalf. Government has increased MRA revenue collection target by K69 billion for 2023/2024 financial year. But MRA commissioner general John Bizwick says the revenue collectors will meet the target. The revenue is expected to be collected before end of the fiscal year on March 31, 2024. MRA commissioner general John Bizwick disclosed this on Tuesday 10 January 16, 2024 in Salima during presentations of awards to best performing MRA stations. Bizwick said that with the additional revenue, MRA is now expected to collect K245 billion in January 2024 from K218 billion, K174 billion from K155 billion in February and during the the last month of March K199 billion is expected to be collected from K176 billion .