Saturday, November 8, 2003

War and drought are the standard explanations for starving Africans. War and drought definitely take their toll. But so do tax rates.

Economist Jude Wanniski has taken a look at taxation in Ethiopia. This is what he found.

A farmer who earns $68 a year after expenses from cash sales of a crop is taxed 10 percent. Once a farm’s annual income passes the $4,235 mark, additional income is taxed at 89 percent. Mr. Wanniski wonders if such a tax system wouldn’t cause Ethiopians to starve in the absence of war and drought.

Desperate for tax revenues, the Ethiopian government is blind to the incentive effects. Mr. Wanniski reports there is a 150 percent excise tax on beer, 80 percent on soft drinks, 75 percent on tobacco, 100 percent on fuel and so on. In addition, there is a 15 percent value-added tax. With such gargantuan sales taxes, a poor country’s commerce is snuffed out.

Examining Ethiopian income taxes, Mr. Wanniski found the rates apply to monthly salaries. Consequently, an Ethiopian is taxed even if he is out of work for most of the year and his average monthly income is below the threshold. Moreover, there are no personal deductions. Gross income is taxable income.

These tax rates on 67 million Ethiopians produce $1 billion in annual revenues, of which $125 million services Ethiopia’s debts to the International Monetary Fund and other foreign lenders.

Many things are wrong with this picture. Ethiopia is in the revenue-minimizing range of the Laffer Curve. Even the IMF must know this. The IMF is supposed to advise debtors about economic policy. In Ethiopia, as elsewhere, the IMF has failed.

In Zimbabwe, a 45 percent tax rate strikes enterprise dead when annual incomes reach about $500, with a 30 percent surtax on top of the 45 percent (see

A person might think the Congressional Black Caucus would lead the charge for more realistic taxation. Alas, addicted to handout politics at home, the Black Caucus agitates for more foreign aid to Africa — which means more government funds for warring factions to fight over.

Africa is dying, because Western policymakers are still carrying on their war against Reaganomics. Stagflation — rising inflation and unemployment — offered control-minded policymakers the chance to tighten their grip on economies by regulating prices and incomes in order to combat stagflation. But along came President Reagan, who used supply-side economics to reverse the policy mix and cure stagflation.

The Reagan revolution was repeated in England, where Prime Minister Margaret Thatcher slashed marginal tax rates, and in France and Italy, where socialized industries were privatized.

Economies escaped from the clutches of the control-minded, an offense for which Mr. Reagan is not forgiven.

Many Western policymakers place greater value on a more equal distribution of income than they place on economic growth. For them, high tax rates are a desirable tool. They are willing to sacrifice greater income and tax revenue growth in order to narrow income differences.

The controversial program CBS planned to air on Ronald Reagan (and canceled in the face of protest, which may land the already filmed show on cable) was a propaganda attack designed to destroy Mr. Reagan’s success in order to restore belief in government solutions. Neoconservatives, with their goal of American Empire, are helping the left wing revive “big government religion.”

In this atmosphere, Africans are likely to be sacrificed. Giving Ethiopians a Reaganite policy prescription would conflict with the desire to extirpate Mr. Reagan’s influence.

If tax policy allowed Africans to make money, there would be less incentive for Africans to fight over who controls the government in order to pocket the revenues. Wars would diminish as alternative sources of wealth arose, making it less of a life-and-death matter to have control of the government.

Westerners, however, believe sending food aid is a surer display of compassion than exporting Mr. Reagan’s tax policies. The food aid, of course, subsidizes war. The recipient government uses the aid to feed its supporters, while allowing its opponents to starve.

This seems to be Robert Mugabe’s plan in Zimbabwe. His attack on white farmers disguises that his real target is his black opposition.

Now that Mr. Mugabe has destroyed the farms that fed the country and provided export earnings, famine looms. Food aid will enable Mr. Mugabe to nourish his supporters while starving the opposition. The compassionate Western donors will be complicit in an act of genocide.

But Western policymakers will be saved the pangs of bad conscience by their refusal to recommend Reagan policies “that benefit the rich.”

Paul Craig Roberts is a columnist for The Washington Times and is nationally syndicated.

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