Analysis: President Kais Saied’s recent proposal to use new taxes on the rich to prop up the state subsidies system is seen by some economists as risky in light of Tunisia’s economic and political turmoil.
In the grip of a spiralling economic crisis, Tunisian President Kais Saied has raised a proposal – new taxes on the rich to subsidise the poor.
“Instead of lifting subsidies in the name of rationalisation, it would be possible to introduce additional taxes on those who benefit from them without needing them,” Saied suggested at a meeting with Prime Minister Najla Bouden at the start of June, following discussions with Tunisian economists and academics about the removal of state subsidies in relation to stalled talks with the International Monetary Fund (IMF).
Tunisia has a longstanding universal subsidies system by which basic foods, fuel, and other goods are subsidised by the state.
The issue of subsidies is one of the main points in dispute between Tunisia’s government and the IMF obstructing the crisis-stricken country from reaching a final agreement, which would result in it unlocking the $1.9 billion loan package.
"Economic experts in Tunisia warn that the country's economic turmoil could worsen if new taxes are imposed, saying they could lead to investment flight and ultimately result in more pressure being placed on the country's struggling economy" However, the seemingly rational proposals are being viewed by some as little more than a shallow “economic populism” – mirroring the political populism Saied and his presidency have been characterised by.
Moreover, economic experts in Tunisia warn that the country’s economic turmoil could worsen if new taxes are imposed, saying they could lead to investment flight and ultimately result in more pressure being placed on the country’s struggling economy.
Reda Al-Shakandali, an economics professor at Tunis University who took part in the discussions, said Saied had also touched on using the funds generated to support private companies to hire the unemployed.
Additionally, possible measures were floated to balance Tunisia’s fraught finances on a basis of social justice, according to a statement on the Tunisian presidency’s official Facebook page.
Tax the rich
Although last year the Tunisian government did embark on an economic reform programme, which included lifting subsidies in the food and energy sectors, Saied has vocally rejected any further reforms which would put additional pressure on the poorest in Tunisian society.
Instead, he has suggested that some of the burden be borne by the rich through the proposed taxes on those who benefit from subsidies without needing them. Funds generated would go into Tunisia’s General Compensation Fund, through which the state’s universal subsidies system is financed.
Economist Abdulrahman Al-Lahiqa told Al-Araby Al-Jadeed, The New Arab’s Arabic-language sister edition, that the idea is ill-advised because clear and official data is absent when it comes to identifying those who are wealthy enough not to require state subsidies – especially in the light of the massive growth in Tunisia’s parallel economy.
He explained that imposing taxes on those ineligible for state support requires precise statistics on who is in this group – on their income and ability to take on new tax burdens – which isn’t possible in a country where the informal sector employs over 40 percent of the labour force.
There is no database the government can consult, and it won’t result in tax justice, adds Lahiqa, when the shadow economy generates 28 percent of the country’s GDP.
He added that Tunisia suffers from high fiscal pressures, borne by all classes, and what is needed is a change in the tax system so the tax burden is divided between Tunisians on a fairer basis without imposing new taxes.
Lahiqa believes it would be possible to lift subsidies without harming the poor and middle classes if a consensus was reached between all parts of society on how to achieve it.
"What is needed is a change in the tax system so the tax burden is divided between Tunisians on a fairer basis without imposing new taxes" IMF conditions
Reforming the subsidies system – especially in food and fuel – is one of the IMF’s core demands for it to grant Tunisia the proposed loan. However, its recommendations have been rejected by both the Tunisian president and the Tunisian General Labour Union (UGTT), who have warned that the IMF’s conditions would “impoverish the Tunisian people even more”. [Click and drag to move]
At the start of 2023, the Tunisian government stated that it intended to introduce periodic adjustments to fuel prices, after Tunisia’s 2023 budget law revealed swingeing cuts to subsidies, an unprecedented 26 percent decrease from 2022. However, not a single adjustment has been made since the start of the year.
According to the budget, 8.8 billion dinars ($2.9 billion) were earmarked to subsidise fuel, electricity, transport and food, down from 12 billion ($4 billion) last year, and social security payments to the poorest Tunisians were dropped by 8 percent.
However, the government did pledge to compensate up to 8 million eligible Tunisians for having removed the subsidies, using direct cash transfers.
The dilemma of tax evasion
Opinions differ in Tunisia as to whether imposing new taxes on the wealthy to support the state would actually work.
Financial expert Muaz Hadidan believes taxing wealth could lead to an increase in tax evasion and increase the tax burden on “tax-obligated” groups. He cited the French experiment with a wealth tax that had failed, and a report by the French Court of Accounts which confirmed that the cost of introducing the wealth tax had been more than the revenues extracted by it.
Hadidan said the government is required to find solutions to create wealth – not to tax it – and believes it is unjust to make groups contributing to wealth creation in Tunisia pay the price for the government’s inability to reform Tunisia’s state support system.
Meanwhile, clamping down on tax evasion is at the centre of the economic reform plan proposed by the UGTT, which demands measures to alleviate the tax burden on tax-obligated groups, especially wage earners.
The Tunisian government said in the 2023 budget law it intended to increase the mobilisation of fiscal resources worth 1.8 billion dinars by raising tobacco prices, which would provide an additional 300 million dinars for the treasury, among other revenue-generating measures.
Investment flight risk
On another front, the idea of new taxes is making some in Tunisia anxious amid warnings that growing financial pressure could increase investment flight, leading to a further decline in tax revenue. [Click and drag to move]
Economist Khaled Al-Nouri believes the state could actually increase its own resources if an effective plan to absorb activity in the parallel economy was set out without resorting to burdening investors with new taxes, which could lead to the flight of traders and major companies. According to official statistics, foreign investments in Tunisia rose by 18.4 percent in 2022.
Nouri pointed out that increasing tax pressures on salaried workers and those in regulated professions would add to their hardship while activity continues to grow in the informal economy – where no one is paying tax.
He also stressed that the tax burden in Tunisia is already among the highest in Africa, and highlighted that tax justice would need a widening of the tax base in order to generate the necessary resources to maintain the state’s social welfare role.
"The idea of new taxes is making some in Tunisia anxious amid warnings that growing financial pressure could increase investment flight, leading to a further decline in tax revenue" Tunisia currently applies around 850 tax measures, which have increased tax revenue from around 6 billion dinars in 2010 to 30 billion in 2022.
Moreover, a study by the Tunisian Institute for Competitiveness and Quantitative Studies (ITCEQ) revealed an increase in the tax burden on wage earners in Tunisia had reached 34.85 percent in 2016, from 30.17 percent in 2006.
The study also showed that the share borne by wage-earners in their marginal tax rate increased from 16.80 percent in 2006 to 25.19 percent in 2017, while the share incurred by the employer only increased from 16.85 percent in 2006 to 17.2 percent.