Developing a Sustainable Economy in Cameroon

15 - Determinants of the Level of Taxation in Cameroon

15 Determinants of the Level of Taxation in Cameroon Dorothy Nkogko Agbor Introduction The Cameroon government’s role in national life is increasing, particularly in income and wealth redistribution, internalization of externalities, regulation and supervision of the economy, and the provision of public goods and services. All these entail huge costs. Hence, financial resources must be constantly mobilized in ever-growing amounts, from various sources, to satisfy the rapidly expanding demands for spending. There are four possible ways through which governments can mobilize revenue: (i) simply print more money and use it to purchase goods and services; (ii) charge for the goods and services they provide to their citizens; (iii) borrow either from their own citizens or from abroad; or (iv) raise revenue through taxation. Taxation remains the most appropriate way to mobilize resources to finance government expenditure. Taxation is therefore a powerful policy instrument that has the dual role of securing resource transfers to the public sector for application to planned uses and inducing the private sector to operate in conformity with planned objectives. It is known that taxation creates distortions as such authorities must design a tax policy that is capable of raising adequate revenue to meet a government’s revenue targets while minimizing the level of associated distortions. Given the comparatively limited amounts of resources that are ordinarily possible and prudent to obtain from abroad and from non-tax revenues, many developing countries have felt the need to raise the necessary revenue internally. The level of taxation is usually judged in terms of the ratio of taxes to some measure of national income. What elements should be included in the numerator and the denominator of the ratio would depend on what aspect of the government’s role one wishes to reflect on. In assessing the actual and potential tax level of any country one must take into account not only the stage of development and the structure of the economy but also the economic philosophy of the country and its relevant special circumstances (Amin 2000). In the past, efforts have been made to estimate ‘tax capacity’ by 307 Agbor: Determinants of the Level of Taxation in Cameroon applying cross-sectional parameter values of explanatory variables such as per capita income, sectoral distribution of income and openness of the economy. However, there is an increasing recognition that tax capacity depends not only on tangible economic characteristics but also on a variety of non-economic factors such as political will, administrative efficiency and culture of tax compliance. In this chapter we investigate the level of taxation in Cameroon for the period 1972–2002. The approach employed is not merely to provide statistical analysis but also to offer a qualitative appraisal of tax level trends in Cameroon for the period under study. The main aim is to ascertain how the tax system of Cameroon can be structured to take advantage of the potential for growth as more advanced sectors develop over time. Thus, the principal objective is to analyse the impact of economic and non-economic factors on the level of taxation in Cameroon. The rest of the chapter unfolds as follows: a section on theoretical considerations and reviews of past empirical studies is followed by an outline of Cameroon’s macroeconomic performance and analysis of the interaction between this performance and the level of taxation; the next section presents the empirical framework and summarizes the estimation results, and the last section is devoted to drawing inferences from the research findings and concludes with ensuing policy implications. Statement of the Problem and Significance To make up budget deficits, the Cameroon government had to borrow heavily. The seriousness of the problem forced the government to abandon some of its development objectives and devote the greater part of new loans to paying off old ones. An analysis of the performance of central government current revenue indicates that during the period of high growth rates (1978–85), the average tax ratio to GDP was 17.1 per cent. During the economic recession period (1987–93), the ratio was 13.8 per cent and during the reform and return to growth period (1994–97), the ratio stagnated at 13.9 per cent. These figures reveal that the tax ratio has been declining since 1987 albeit efforts made by the government to stimulate the economy through extensive economic and fiscal reforms. Yet the average level of taxation is still considerably lower (14.6 per cent) than that in other Economic and Monetary Community of Central...