New data on e-direct debit in Ghana: Unpopular tax on mobile money transfers hits the poor hardest
Ghana’s introduction of a a 1.5% tax on mobile money transactions in May 2022 has been closely watched by policy makers across Africa. Proponents of the electronic transaction tax (e-levy) argue that mobile money taxes – commonly known as MoMo in Ghana – offer cash-strapped governments an opportunity to raise funds in the post-pandemic context complex.
In Ghana, the “e-levy” has been linked to the “Ghana beyond aid» aid dependency reduction strategy.
Taxes on MoMo, in Ghana and elsewhere, have also been justified as a way to ‘capture’ those working in the informal economy, who are perceived as untaxed. Critics, however, have pointed out that informal workers (who constitute 89% of total employment in Ghana) are already paying a range of fees and taxes. They could therefore be disproportionately affected by this new tax.
Despite much speculation about the impact of e-tax, there has been little empirical evidence. In particular, it is important to consider how informal workers actually use mobile money, how the tax affects them, and how they perceive it.
Our recent study examined the likely impact of the tax on high and low earners in the informal economy. It was based on a representative survey of 2,700 informal sector operators – employers and self-employed – in Accra before the tax was introduced. We found that despite the minimum threshold protecting some users, the tax likely has a negative impact on equity. We also found that informal workers’ skepticism of the tax was rooted in equity concerns and distrust of government more broadly.
Hypothesis 1: electronic direct debit will target high incomes
One of the assumptions prior to the implementation of electronic direct debit was that it would be an effective way to target the highest earning segments of the informal sector. These segments are perceived to be under-taxed and more likely than low-income people to use mobile money.
A key question, therefore, is whether mobile money usage is concentrated among high-income people. This hypothesis only partially resists the evidence. We found that around half (51%) of informal sector operators in Accra use mobile money. It is widely used by women and men, by different professional groups and across the income distribution. But the breakdown of actual monthly transaction amounts is revealing (Figure 1).
As expected, the highest earning group (quintile 5) reported making the most transactions on the MoMo platform (about 500 and 700 cedis for women and men, respectively). However, low-income people will also be affected by the electronic tax. This is because informal workers in the lowest income group transacted more than those in several of the highest income categories.
About 41% of MoMo users in the informal sector do not have a bank account. Mobile money transfers can be particularly important for the unbanked, who typically represent the weakest and most vulnerable segments of the workforce. We found that 43% of people in the lowest income quintile had bank accounts, compared to 54% in the highest income quintile.
Hypothesis 2: excluding small transactions will make the levy fair
It was expected that the exemption for transactions below 100 cedis per day would protect low-income people. It was expected to limit the negative impacts of the tax on the poor.
Based on MoMo usage data, we were able to estimate electronic debit liability based on whether the previous month’s mobile money transactions exceeded the 100 cedis threshold. Sixty-one percent of users said they would be liable for a certain e-debit payment amount based on their past MoMo transaction patterns and amounts. Here, our results provide some support for the government’s suggestion that the threshold would protect approximately 40% of MoMo users of taxation.
However, when the amounts of mobile money transactions above the threshold are calculated as a share of revenue, it is clear that the tax remains a highly regressive tax (Figure 2) – meaning that the tax burden is the highest on the lowest incomes.
Low-income people bear a disproportionate share of the tax. The tax would represent just over 8% and 6% of the monthly earnings of men and women, respectively, in the lowest income quintile. In the top income quintile, on the other hand, the projected tax would be less than 1% of income for both women and men.
Hypothesis 3: Support for electronic direct debit would vary across policy lines
As other polls pointed out, electronic direct debit is very unpopular in Ghana. We found that 83% of informal workers in Accra disapproved of it. They worried about how it would affect the poor, whether it would be unfair or increase an already high tax burden.
The levy was subject to verbal and even physical criticism fights in parliament between the two main parties. The New Patriotic Party administration blamed public opposition to the tax on alleged propaganda by the minority National Democratic Council. This could suggest that support for the levy would largely fall in favor of the parties. Our study found that supporters of the New Patriotic Party were indeed more likely to support the levy. But only 32% of them approved. Overall, perceptions of the government and its performance influenced opinions on the levy.
We also found that women were more critical of e-debit, even when we controlled for a range of demographic and political characteristics. Only 12% of women approved of it, compared to 21% of men. This striking difference highlights the importance of further research in this area, particularly to explore the relative impacts on men and women.
Implications for policy
The designers of Ghana’s e-levy argued that it would lead to a better distribution of the tax burden by bringing ostensibly untaxed informal sector workers into the tax net (equity) while protecting the poorest (equity). ). Although the threshold is successful in protecting some low-income users, we have found that electronic debit is still very regressive.
Our evidence suggests that the threshold should be raised and regularly adjusted for inflation. More generally, tax authorities should focus on other ways of taxing high-income workers in the informal economy, including professionals. At the very least, revenues from the e-tax should be used in a way that offsets its distributive effects. This could mean targeting new spending on public infrastructure, goods and services that benefit informal workers. The government could also subsidize premiums paid by informal sector workers to join the national health insurance scheme or contributions to the national pension scheme.
Our data suggest that key decisions about policy design and implementation have been based on assumptions that are not supported by empirical evidence. Continued research into the impacts of e-tax in the months and years to come will help ensure that policy-making is evidence-based, with a more comprehensive understanding of how the tax affects citizens and the workers.
Mike Rogan, Associate Professor, Rhodes University; Max Gallien, researcher, Institute for Development Studies; Nana Akua Anyidoho, Associate Professor and Director, Center for Social Policy Studies, University of Ghana, University of Ghana, and Vanessa van den Boogaard, Researcher, Institute of Development Studies
This article is republished from The Conversation under a Creative Commons license.