The fairness and efficiency of a tax system has significant impact on whether entrepreneurs (particularly smaller and micro enterprises) and individual citizens choose to join the formal sector. If they believe that the tax system is fair and that the state will use their tax revenues wisely, they are more likely to participate. A state with a larger tax base can typically pursue more growth-oriented priorities, including expenditures on public goods such as education, health, and infrastructure, all key to the success of the agribusiness sector. Moreover, when more individuals and businesses participate in the tax system, the state can reduce the amount of the payments it seeks from each taxpayer.
The tax system also helps to determine the incentives agricultural producers face. Historically, agricultural products were taxed at relatively high rates when compared to other products in the same economy—leading to distortions in the market that had the perverse effect of discouraging agricultural investment where it was needed most.
Agribusinesses that could also be described as manufacturing firms (e.g., those producing biofuels, flour, fertilizer) are likely to be subject to corporate taxes (e.g., turnover taxes, taxes on profits) similar to those paid by any other manufacturing firm. Depending on the defining laws, cooperatives functioning as agribusinesses often retain a “non-profit” character. As such, they may not be subject to standard corporate taxes.
An analysis of the 2004 Doing Business data indicated that higher corporate tax rates discourage investment, are positively associated with the size of the informal economy, and are inversely correlated with growth.1 Agriculture-based economies, especially in Africa, tend to have poor scores.
To understand the full impact of taxation on the small and micro enterprises dominant in the agricultural sector, it is important to assess how taxes are levied on specific commodities (and producers or traders of those commodities). To understand the relative rates of taxation (or subsidy) on agriculture and non-agriculture, an analysis of the terms of trade is useful.
Taxes on the majority of agricultural enterprises are of two types:
• explicit or direct taxes on land, outputs, inputs, and sales; and
• implicit or indirect taxes on or subsidies to the non- agricultural sector that change the terms of trade for agriculture.
Direct taxes. Direct taxes on land (property taxes) are a key element of agricultural taxation in developed countries but are relatively less important in the developing world, in large part because of limitations on private ownership of property. Some countries (e.g., Vietnam) have circumvented the ownership issue by levying taxes on use. However, collection of taxes on rural real estate is relatively difficult and costly in administrative terms.
By comparison, market-based taxes or trade taxes on sales of agricultural products are relatively easy to collect, especially when the commodity is imported or exported. Private trading agencies and state trading enterprises provide centralized tax collection points and offer lower administrative costs. This relative ease of collection has encouraged governments to place greater reliance on market-based taxes for a limited range of commodities.
Raw or minimally processed agricultural commodities exported into regional or global markets have traditionally been the most significant source of agriculture-based revenue for the exporting country. Generally, licenses to export are limited in scope and number, and national revenues can be collected in a cost-efficient way as the products must pass through ports or airports where they are weighed and valued and a clear paper trail is created. However, high rates of taxation on agricultural exports have been shown to pose strong disincentives to production and/or increased incentive to ship commodities through neighboring countries with less onerous export taxation regimes.2
Under the Uruguay Round of international trade negotiations and the ongoing debates within the World Trade Organization (WTO) on the Agreement on Agriculture, as well as within the regional trading negotiations that have led to the creation of regional trading blocs, developing countries have come under some pressure to rethink these policies. Many countries have brought export tariff rates down and now allow tariff-free export within a trading bloc of neighboring commodities. Some countries, such as Ghana, have recently lowered export tax rates on processed agricultural commodities to provide an incentive to foreign companies to invest and to domestic companies to add greater value-added (and create jobs) in-country.
Import tariffs on inputs (e.g., fertilizer, seeds, machinery) are another explicit tax on agribusiness. In the interests of encouraging upgrades to agricultural technologies, though, many developing countries keep these tariffs low.3
Indirect taxes. While international trade talks have led to reduced direct taxes in many cases, several analysts have pointed to the implicit or indirect taxes imposed on agriculture as important, negative impacts on agribusinesses:
The indirect tax on agriculture, through overvalued currencies and industrial protection, was nearly three times the direct tax on the sector [in 1982]…With reforms in the 1980s and 1990s to restore macroeconomic balance, improve resource allocation, and regain growth in many of the poorest countries, both direct and indirect taxes were reduced. The reform of overvalued currencies, which taxed agricultural exports (usually exported at the official rate of exchange) and subsidized food imports, is reflected in the huge reduction in the parallel market premiums for foreign currency in developing countries.4
1 Simeon Djankov et al., “The Effect of Corporate Taxes on Investment and Entrepreneurship,” available at http://www.doingbusiness.org/features/Research-Corporate-Taxes.aspx.
2 A World Bank brief, “The Plundering of Agriculture in LDCs” summarizes these. See www.worldbank.org/html/dec/Publications/Briefs/DB3.html.
3 If a private business is doing the importing, however, that firm will be subject to corporate taxes and is likely to pass some of that burden along to input buyers.
4 World Bank, World Development Report 2008 (2007), at 98, available at http://siteresources.worldbank.org/INTWDR2008/Resources/WDR_00_book.pdf.
