Download Carl Grote October 28, 2011 Impact of Tanzania`s Income Tax Act

Carl Grote
October 28, 2011
Impact of Tanzania’s Income Tax Act, 2004 on Agricultural Output and Growth Rates
General Topic: Tax effects on agricultural output in a developing economy
Introduction: The Tanzanian government cites its farming sector as the foundation of the Tanzanian
economy. Thus, certain provisions of the 2004 Income Tax Act were aimed to provide agricultural
investment and development incentives to Tanzanian farmers. Under the new tax law the government
provides farmers with allowances of 50% of the net cost of newly acquired agricultural assets. Further,
agricultural plant and equipment, and expenditures on agricultural improvement such as, clearing of
land and planting trees to prevent soil erosion are immediately written off. In addition, buildings and
structures used in agricultural production are written off over a five year period on a straight line basis.
Lastly, agricultural and land development research expenditures are deductible. Utilizing data from the
World Bank’s Africa Development Indicators data set, this paper will attempt to estimate the magnitude
of the effects from the new tax law by running multiple regressions across time using different measures
of agricultural output and output growth rates as dependent variables. Agricultural GDP, production in
tonnes for staple crops, and amount of tractors in the country will be used as these dependent
variables. Presumably, the tax reliefs should have a positive effect on agricultural output, growth rates,
and investment in agricultural resources. Capturing this effect accurately, however, could prove
challenging. After all, factors including human capital inputs, percentage of population working in
agriculture, amount of arable land, rural financial services, and weather will certainly affect agricultural
productivity. So, my regression analyses will have to control for these effects. Lastly, the Africa
Development Indicators database contains data for all African countries and includes up to 1500
variables that measure a wide range of development indicators. Fortunately, many of these variables
measure annual agricultural inputs and outputs such as percentage of the population employed in
agriculture, amount of land being cultivated, etc. I hypothesize that the tax reliefs provided in the
Income Tax Act of 2004 have had statistically significant effects on agricultural output and growth rates
after controlling for other variables that effect agricultural GDP.
References:
Hoekman, B. "Agricultural Tariffs or Subsidies: Which Are More Important for Developing
Economies?" The World Bank Economic Review 18.2 (2004): 175-204. Print.
This article analyzes the effects of agricultural subsidies and border protection by developed
nations on the economies of developing nations. The author asserts that lifting subsidies would likely
benefit the productivity of developing agricultural economies with trade surpluses. On the other hand,
developing nations with trade deficits would suffer from a lift on these subsidies. Thus, the author
constructs an equilibrium model of global commodity trade that suggests reducing border protection
may be a more effective method of boosting welfare and productivity. Moreover, the authors find that a
50 percent cut in export subsidies can have a positive effect on agricultural exports. Because exports
could be used as a proxy for agricultural production and subsidies, like taxes, are a method of price
intervention, there stands reason to believe that tax cuts should have some effect on agricultural output
as well.
Fulginiti, Lilyan E., and Richard K. Perrin. "Prices and Productivity in Agriculture." Review of Economics
& Statistics (1993): 471-82.
Fulginiti and Perrin’s article estimates an agricultural production function using expected prices
as an input to production. Their model suggests that lower price expectations had positive effects on
agricultural production. Also, in one regression estimate the authors find a positive and significant
relationship between productivity and the number of man-years of governmental agricultural research.
Thus, the deductibility of agricultural research for income tax purposes in Tanzania should likewise have
a positive effect on productivity. This result has important implications for developing agricultural
economies especially those choosing to enforce heavy taxes on farmers. Finally, the authors conclude
that high taxes on agricultural sectors have decreased agricultural productivity by as much as 50 percent
in the past, as well as low wages in the farming sector. So, my study should perhaps include a control for
average farmer wages in Tanzania.
Halter, A. N., M. L. Hayenga, and T. J. Manetsch. "Simulating a Developing Agricultural Economy:
Methodology and Planning Capability." American Journal of Agricultural Economics 52.2
(1970): 272.
The authors of this article provide a simulation of a developing agricultural economy using
mathematical models. They then apply the simulation to the Nigerian economy which has experienced
extremely slow economic growth. However, Nigeria, like Tanzania, depends heavily on agriculture as
over 60 percent of GDP comes from the farming sector. Their model attempts to estimate the impact on
farm income of decreasing the difference between world and domestic prices for export crops in
Nigeria, increasing agricultural production and crop variety research, and stimulating investments both
public and private in industries that produce agricultural inputs. One important finding of the model
simulation was that food crop yields increased when they were grown in competition with non food
crops. So, perhaps my research should control for shifts in the types of crops being grown.
Lu, Mai, and Calla Weimer. "An End to China Agriculture Tax." China: An International Journal 3.2
(2005): 320-29.
In 2004, China enacted a phase out of its agriculture tax to prevent farmers from leaving the
agriculture sector for other employment opportunities and increase rural social stability. The tax, in fact,
achieved its desired effect. Following the enactment in 2004, grain outputs reversed a declining trend in
grain output as outputs rose nine percent. Further, rural income per capita increased by nearly eight
percent. While the tax weakens government revenues from the peasantry, an income source the
People’s Republic of China has traditionally relied heavily upon, it has clearly benefited the agricultural
community and the farming sector of China’s economy. So, my study will attempt to find similar effects
of Tanzania’s agricultural tax reliefs.
Wilson, Christine A., Allen M. Featherstone, and Del D. Elffner. "The Effects of a Federal Flat Tax on
Agriculture." Review of Agricultural Economics 24.1 (2002): 160-80.
While this paper examines the potential benefits of a flat tax system on agricultural producers,
the authors offer some interesting variables in their analysis. First, they suggest that a flat tax may
impact interest rates, and thus investment. Presumably, increased investment induced by a flat tax
could create substantial benefits for farmers. Thus, not only do lower taxes, and in this case a flat tax,
enhance agricultural productivity by lowering the cost of farming, but also can create benefits by way of
increased investment.
Tarimo, David. "Tanzanian Tax Regime- an Overview for Investors." The Citizen. 6 May 2010. Web. 27
Oct. 2011. <http://www.thecitizen.co.tz/editorial-analysis/20-analysis-opinions/1789tanzanian-tax-regime--an-overview-for-investors.html>.
“Agriculture." Web. 27 Oct. 2011. <http://www.tanzania.go.tz/agriculture.html>.
Mutumweno, Nawa. "Esaanet." ESAANet. Web. 27 Oct. 2011.
<http://ntwk.esaanet.com/index.php?option=com_content>.