State funding of political parties Tax revenues and political parties financing
By Accra Daily Mail Feature Article | Fri, 14 Mar 2008
| 
 Everything has it's beauty but not everyone sees it. - By: Anita Owusu Boateng  |
At a forum (2007) held at the Institute of Economic Affairs (IEA, Ghana), it was proposed that every year, two percent of revenue from the value added tax (VAT) must be set aside in a 'special fund' to support the activities of political parties. The argument goes something like this: Politics is for the public purpose. It takes money to organize political activities. Therefore politicians need committed state funding if democracy is to thrive.
Fairness and efficiency
I wish to point out that although there is a case for state support of political activities, the proposal on the table needs careful scrutiny before it evolves seriously into a legislative instrument. There are a number of concerns. It presumes too much, first about the needs of political actors, and second, about the links between the scale of political activities and good governance.
It provides perverse incentives for political entrepreneurship. It limits fiscal flexibility in the use of tax resources. It makes politicians vulnerable to the charge that their behaviour is unshaped and uninformed by the needs of the governed. There ought to be a fairer and efficient way to achieve the same ends.
1. The Case for Public Funding. Before I turn to my arguments, let me make a case for some form of funding for political activities. Public funding of political activities recognizes that political activity is essential for democracy to thrive. And for a young democracy badly in need of building society's institutions, a vibrant and level playing field for politics is essential. This is especially so if we are to curb the emergence of governments controlled by a small group of rich people. Competitiveness in the political marketplace is desirable. It provides the electorate choices among politicians. Their choices, however, must be informed.
It is reasonable to expect that political parties make choices. They define the scale of their activities. And do so in ways that are best for the party, and hopefully, in ways that will best communicate their vision to the electorate. How much resources a party spends on political activities depends on the party's perception of the 'rewards' for winning. If a party's vision of social and economic choices is in the best interest of the majority, the party earns the privilege to run the affairs of state. The goal of public support is to guarantee a minimum level playing field for all duly recognized parties and provide equitable access to the electorate.
But should public support be partial or full cost? Let us bear in mind that first, politicians, not the state, define the scope and scale of their campaigning activities. Second, political activity is not predominantly a public good. There is a public goodness about politics. But, like plumbing, there are also private gains. In fact, political parties are merely associations that wish to take turns at ruling and running the affairs of the state. It is in error to suppose that any group which professes to such ends necessarily must be publicly funded in part or in whole. Clearly, there are many other associations that could lay similar claims because they too aim at some good or at some public purpose.
It is only fair to expect that those who aspire to be political actors see a part of this process as a necessary private investment. On their own, they must develop and communicate their vision. Those who share this vision will be expected to endorse it through electoral votes before parties become eligible for public support.
2. The Objections: The IEA meeting was essentially an opportunity for politicians to make their case for public support. As different as their preferences may be, they were on common ground in setting aside 2 percent VAT revenue every year for this purpose. For example, an annual 15 percent rise in VAT revenues means an automatic 15 percent rise in political funding. The proposal amounts to what is essentially a cartel of politicians setting a built-in annual total tax price for political activities based on their perception of the public's ability to pay. Proponents of the two percent rule may not have thought about it this way. But it certainly feels that way. And that way surely violates the principle of fair pricing.
Let us keep in mind that political actors are not only potential lawmakers. In office, they must also allocate resources for the public good, and, more crucially, can vary the allocation of tax burden among citizens. It is in this light that the allocation into a 'special fund' of a fixed percent of VAT to finance the vocation of choice of a very small segment of the population must be seen as unethical. Politicians must not be seen as laying a prior claim to a vital resource, tax revenues, before the ordinary citizen. That is worrying.
The proposal creates wrong incentives for the proliferation of political parties and political entrepreneurship as an end in itself. Earmarking will not necessarily bring out the best of civic minded men and women to serve the state. In fact, having a protected 'special fund' is more likely to attract those inclined to political opportunism than those inclined to seek the public good selflessly.
Let us assume for the sake of illustration that the two percent VAT rule was put in place in the year 2000. How much would have been allocated to the 'special fund' from the budget? In equivalent GH˘ terms, the 'special fund' would have grown from GH˘0.77 million in 2000 to GH˘2.8 million in 2004, and to GH˘4.72 million in 2006. Between 2000 and 2006, the average annual growth of the 'special fund' of 36.2 percent would have been greater than the average nominal growth in national output of 28 percent for the same period. No public interest argument can adequately justify such arithmetic.
Earmarking also limits fiscal flexibility because those funds cannot be used for whatever purpose the government might deem necessary. Since the mid 1980s, portions of government revenues have been earmarked or assigned specific purposes. The District Assembly Common Fund assigned a 7.5% of government revenues to support decentralized local government financing.
The Road Fund, the Ghana Education Trust Fund (GETFUND) and the National Health Insurance Levy (NHIL) are all assigned revenues from total revenues or from the value added tax. Some earmarking is justifiable on socio-economic grounds. Some are not. If increased flexibility, transparency, and accountability of public spending are desirable, then we should aim for less not more earmarking of public funds. There are many who would argue that Ghana's public finances are already “over earmarked”.
Another vice here is that the link between annual VAT revenues and political party spending does not necessarily reflect taxpayers' preferences for the kind of public services or wants that should grow with increased revenues. The IEA proposal assumes that increased political activity is what the public necessarily wants.
Moreover, on efficiency grounds, there is no clear connection between the benefits of increased political activities and the growth of VAT revenues. To tie political party funding so closely to the year-to-year growth in revenues presumes some identifiable linkages. Surely, politicians may have passed tougher tax laws, but they would have done no more in revenue mobilization than the tax officers who implement the law.
Why do some policy-makers prefer earmarking of revenues? Earmarking reduces taxpayer's resistance to higher taxes. In this case, the two percent VAT rule is beneficial because it guarantees political parties automatic increase in funding in ways that are not related to their productivity or to their contribution to good governance. But, it also places political actors in a zone where the electorate can no longer place enormous trust in their ability to imagine the deprivation of the many.
Continued
Fairness and efficiency
I wish to point out that although there is a case for state support of political activities, the proposal on the table needs careful scrutiny before it evolves seriously into a legislative instrument. There are a number of concerns. It presumes too much, first about the needs of political actors, and second, about the links between the scale of political activities and good governance.
It provides perverse incentives for political entrepreneurship. It limits fiscal flexibility in the use of tax resources. It makes politicians vulnerable to the charge that their behaviour is unshaped and uninformed by the needs of the governed. There ought to be a fairer and efficient way to achieve the same ends.
1. The Case for Public Funding. Before I turn to my arguments, let me make a case for some form of funding for political activities. Public funding of political activities recognizes that political activity is essential for democracy to thrive. And for a young democracy badly in need of building society's institutions, a vibrant and level playing field for politics is essential. This is especially so if we are to curb the emergence of governments controlled by a small group of rich people. Competitiveness in the political marketplace is desirable. It provides the electorate choices among politicians. Their choices, however, must be informed.
It is reasonable to expect that political parties make choices. They define the scale of their activities. And do so in ways that are best for the party, and hopefully, in ways that will best communicate their vision to the electorate. How much resources a party spends on political activities depends on the party's perception of the 'rewards' for winning. If a party's vision of social and economic choices is in the best interest of the majority, the party earns the privilege to run the affairs of state. The goal of public support is to guarantee a minimum level playing field for all duly recognized parties and provide equitable access to the electorate.
But should public support be partial or full cost? Let us bear in mind that first, politicians, not the state, define the scope and scale of their campaigning activities. Second, political activity is not predominantly a public good. There is a public goodness about politics. But, like plumbing, there are also private gains. In fact, political parties are merely associations that wish to take turns at ruling and running the affairs of the state. It is in error to suppose that any group which professes to such ends necessarily must be publicly funded in part or in whole. Clearly, there are many other associations that could lay similar claims because they too aim at some good or at some public purpose.
It is only fair to expect that those who aspire to be political actors see a part of this process as a necessary private investment. On their own, they must develop and communicate their vision. Those who share this vision will be expected to endorse it through electoral votes before parties become eligible for public support.
2. The Objections: The IEA meeting was essentially an opportunity for politicians to make their case for public support. As different as their preferences may be, they were on common ground in setting aside 2 percent VAT revenue every year for this purpose. For example, an annual 15 percent rise in VAT revenues means an automatic 15 percent rise in political funding. The proposal amounts to what is essentially a cartel of politicians setting a built-in annual total tax price for political activities based on their perception of the public's ability to pay. Proponents of the two percent rule may not have thought about it this way. But it certainly feels that way. And that way surely violates the principle of fair pricing.
Let us keep in mind that political actors are not only potential lawmakers. In office, they must also allocate resources for the public good, and, more crucially, can vary the allocation of tax burden among citizens. It is in this light that the allocation into a 'special fund' of a fixed percent of VAT to finance the vocation of choice of a very small segment of the population must be seen as unethical. Politicians must not be seen as laying a prior claim to a vital resource, tax revenues, before the ordinary citizen. That is worrying.
The proposal creates wrong incentives for the proliferation of political parties and political entrepreneurship as an end in itself. Earmarking will not necessarily bring out the best of civic minded men and women to serve the state. In fact, having a protected 'special fund' is more likely to attract those inclined to political opportunism than those inclined to seek the public good selflessly.
Let us assume for the sake of illustration that the two percent VAT rule was put in place in the year 2000. How much would have been allocated to the 'special fund' from the budget? In equivalent GH˘ terms, the 'special fund' would have grown from GH˘0.77 million in 2000 to GH˘2.8 million in 2004, and to GH˘4.72 million in 2006. Between 2000 and 2006, the average annual growth of the 'special fund' of 36.2 percent would have been greater than the average nominal growth in national output of 28 percent for the same period. No public interest argument can adequately justify such arithmetic.
Earmarking also limits fiscal flexibility because those funds cannot be used for whatever purpose the government might deem necessary. Since the mid 1980s, portions of government revenues have been earmarked or assigned specific purposes. The District Assembly Common Fund assigned a 7.5% of government revenues to support decentralized local government financing.
The Road Fund, the Ghana Education Trust Fund (GETFUND) and the National Health Insurance Levy (NHIL) are all assigned revenues from total revenues or from the value added tax. Some earmarking is justifiable on socio-economic grounds. Some are not. If increased flexibility, transparency, and accountability of public spending are desirable, then we should aim for less not more earmarking of public funds. There are many who would argue that Ghana's public finances are already “over earmarked”.
Another vice here is that the link between annual VAT revenues and political party spending does not necessarily reflect taxpayers' preferences for the kind of public services or wants that should grow with increased revenues. The IEA proposal assumes that increased political activity is what the public necessarily wants.
Moreover, on efficiency grounds, there is no clear connection between the benefits of increased political activities and the growth of VAT revenues. To tie political party funding so closely to the year-to-year growth in revenues presumes some identifiable linkages. Surely, politicians may have passed tougher tax laws, but they would have done no more in revenue mobilization than the tax officers who implement the law.
Why do some policy-makers prefer earmarking of revenues? Earmarking reduces taxpayer's resistance to higher taxes. In this case, the two percent VAT rule is beneficial because it guarantees political parties automatic increase in funding in ways that are not related to their productivity or to their contribution to good governance. But, it also places political actors in a zone where the electorate can no longer place enormous trust in their ability to imagine the deprivation of the many.
Continued
"The Author's/Authors' views do not necessarily reflect those of ModernGhana."
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