IH Securities warns of ‘Laffer curve effect’

IH securities said if successful, the recently introduced measures could have the intended effect of expanding revenue capacity.

LOCAL financial services firm IH Securities says the downside risk of the sweeping tax reforms introduced last week might be the “Laffer curve effect” leading to a reduction in tax revenue to government coffers.

Last week, Treasury increased taxes while introducing new ones to fund the  ZWL$58,2 trillion 2024 national budget.

The measures include the introduction of a wealth tax, the domestic minimum top-up tax and a US$0,02 levy per gramme of sugar contained in beverages. Treasury also raised fuel levies, tollgate and passport fees, the corporate tax rate, presumptive taxes, car registrations charges, and compelled businesses with an annual income of US$25 000 to be registered for value-added tax (Vat).

However, in its analysis of the 2024 national budget, IH Securities said these new taxes could have the opposite effect to raising revenue.

“The government has embarked on extensive revenue-raising measures to mitigate fiscal risks in a year where fiscal revenues from exports will likely trend at best sideways, as commodity prices remain under pressure. High levels of dollarisation have also driven transactions into the shadow economy which is synonymous with lower tax compliance,” IH Securities said.

“As per the ministry, forex revenue into the country’s coffers accounted for only 48% of collections versus an estimated 78% of forex transactions in the economy. This is against growing government US$ obligations.”

IH securities said if successful, the recently introduced measures could have the intended effect of expanding revenue capacity.

“However, the downside to the sweeping reforms might be the Laffer curve effect, which could see revenues falling further. For corporates, the aggregate impact of the new taxes on operational costs is likely to result in thinning margins in 2024, thereby impacting earnings for listed companies,” IH Securities said.

According to American financial and economic literacy website, Investopedia, the Laffer curve effect is based on a theory created in 1974 by the United States supply-side economist Arthur Laffer.

Based on this theory, tax revenue does not always increase whenever the tax rate increases.

Applying the Laffer curve effect on the new taxes would mean an increase in the cost of living and doing business thus depleting disposable incomes for consumers and businesses.

The tax heads most likely to be affected are Vat and income tax.

Economists have argued that raising the tax rates would not have a positive impact on overall revenue as the economy is weakening and more people are becoming impoverished.

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