Museveni’s edict on taxes gives glimmer of what could have been

The President recently called for a streamlining and reduction in the amount of money and the number of taxes, fees and levies paid by the lowest income earners.
Mr Museveni is right. Not only is compliance with the various levies ponderous, high taxes reduce disposable income and thus demand, slowing economic growth.
This thinking informs the government’s generous incentives scheme for large investors, including granting them land, tax exemptions and allowances to recover capital expenditure. This has been heavily abused (see the subsidies to the textile merchants and during the Chogm bonanza, for instance) but the idea of giving some relief during the investment phrase of a business has merit.
What is curious, however, is why the President does not see the need to provide a similar fiscal stimulus to the lower- and middle-income segment of society – the squeezed middle that does most of the consumption.
Take a typical Ugandan employee, let’s call her Anna, with a gross monthly salary of Shs3.6 million, or $1,000. With a countrywide median wage of around Shs500,000, Anna is firmly middle class in Uganda! She pays 30 per cent in pay-as-you-earn income tax, Shs100,000 per year in local service tax, and value-added tax of 18 per cent on most goods and services consumed. The effective tax rate is therefore north of 40 per cent.
Anna receives no preferential treatment over a market vendor or a cattle farmer when she uses a public road or hospital, despite the latter having much lower effective tax rates. Anna will also pay a higher tariff on electricity, for example, than a large factory despite not being able to write that off as an expense, or expense the salary she pays her housekeeper and gardener. Should Anna decide to invest her meager savings in setting up a small hair saloon, she will have to go through onerous registration processes without any of the incentives available to the bigger investors. As a salaried employee, Anna is a sitting duck for the tax authority.
Here are three things the ‘born-again’ Mr Museveni can consider to bring relief to Anna and her ilk. First, in light of the slowdown in the economy, extend the same idea of cutting taxes to spur consumption to this middle class by reducing the personal income tax rate, by a couple of digits. Market vendors do not shop in malls.
Second, use fiscal incentives, say by making pensions and mortgage payments tax deductible, to drive savings, investment and home ownership. In his 2006 re-election manifesto Mr Museveni had a clever idea to create a pile of money for cheap long-term mortgages. Without the discipline of execution and distracted by political survival, this has fallen through the cracks.
The National Housing and Construction Corporation, which was part-sold to the Libyans in a dodgy transaction, recently said it had reduced the cost of its bungalows in Namungoona, a sub-prime city suburb, to Shs250 million. If Anna were to raise the Shs250m, 10 per cent deposit and get a 20-year mortgage at a prime 18 per cent interest rate over 20 years, she would have to pay Shs3.5 million per month (or her current gross income) and end up paying Shs833 million for the house. Reduce that interest rate to an inflation-edging 7.5 per cent and it falls to Shs1.8 million; still high, but more affordable.
Without such relief, people like Anna either live hand-to-mouth, cast permanently as renters in an economy in which they have no equity or without the comfort, in alternate to tying down value in brick-and-mortar, of cash-generating investments. They are one pay-cheque away from penury.
Third, and most important, is to drive investment in the economy by reducing the cost of money. Here the problem is well known; government’s appetite for borrowing to lead an unsustainable lifestyle of more than a hundred districts filled by thousands of unproductive, cash-chomping political appointees, or simply stealing it to build empty malls and apartment blocks.
Here it gets interesting. Imagine for a moment that Mr Museveni was serving his last term in office. Yes, he might still give the market vendors their tax relief to stop them from pelting his convoy with tomatoes when he retires, but he would wield a bigger broom and clean out the clogged chimney at Steakhouse.
Thus for Mr Museveni to really ring the reforms and reset the economy, he would need to run the country like a man who doesn’t have to worry about being re-elected. The first step to winning is to overcome the fear of failing.

Mr Kalinaki is a journalist and a poor man’s freedom fighter. [email protected]
Twitter: @Kalinaki.