Egypt business heads make case against progressive income tax

Leading figures say progressive taxes could harm the country's economy and that other, looser levies are a better short-term measure

Fiscal reform is desperately needed to bolster Egypt's state coffers. But for businessmen, a range of new levies on sales, property and capital gains are better solutions than a more progressive income tax.
This was the conclusion reached in Cairo on Wednesday during a roundtable discussion at the Egyptian Center for Economic Studies (ECES) attended by business leaders and dealing with new ways to generate higher state revenues.
The broad consensus among attendees was that value added tax (VAT) and levies on dividends, property and capital gains, were a better option than shaking up income tax.
In the wake of last year's uprising, many social campaigners have called for the introduction of progressive taxation that would see higher-earners pay more to the state.
Business figures and economists at Wednesday's discussion, however, said such a move was too ambitious for now.
"We need to generate more fiscal revenue without affecting economic activity, because we have to create jobs," said Magda Kandil, executive director at ECES, who worked on the day's presentation.
"We can impose other taxes that aren't in conflict with that target. The government has also to fill in the gaps in the actual fiscal laws and cut expenses in order to achieve more social justice," she added.
In an attempt to prove this theory, Kandil studied the effects of changes made to Egypt's income tax laws in 2004, when the upper rate was halved from 40 to 20 per cent.
Tax on corporate revenues became flat while personal income tax rates varied from 10 to 20 per cent. A modification introduced in 2011 raised the rate to 25 per cent for those earning over LE10 million (about $1.6 million) a year.
The ECES paper concluded that slashing taxes on corporate revenues led to an increase in tax revenues because many companies were encouraged to pay their taxes.
Tax revenue as a proportion of total GDP climbed from 14 per cent in 2003/2004 to 16 per cent the year after the initial reforms. However this figure returned to near the previous average after the 2008/2009 financial year.
"When the tax was cut many people attacked the law but it achieved and even exceeded its goals," says Hazem Hassan, chairman of KPMG Hazem Hassan Management Consultants and member of the ECES.
But he believes fiscal revenue is still low. "The government need to increase efficiency of fiscal administration and facilitate tax collection. Other taxes than the tax revenue can be imposed or modified," he adds.
The idea of a progressive tax was not without its defenders.
Some participants pointed out that Egypt's biggest contributors in terms of tax revenues are the Suez Canal Authority, the public Petroleum Authority and the Central Bank of Egypt.
"About 76 per cent of corporate tax come from public enterprises and not private corporations," said Gannat El-Samalouty, executive director of the Sawiris Foundation.
"The exemption level is the same for everybody regardless of their status. A single person and a married one with 5 children benefit from the same LE5,000 level of exemption. Taxpayers need to be treated according to their personal conditions," she said.
Omneia Helmy, lead economist at ECES and co-author of the presentation, said 2004's tax reforms made the economy more efficient, by reducing the public deficit, but meant wage-earners saw reductions on their entire incomes, not just basic salaries.
A basic salary in Egypt may make up just a third of a person's overall income.
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