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On the opportunity cost of government taxation by Bright Chizonde


A week or so ago, Facebook was treated to shocking photos of top officials at a named Local Authority, popping Champagne after purchasing luxury 4×4 vehicles using public resources.

I think this behavior is due to ignorance among such officials. They do not understand the opportunity cost of public taxation and therefore see no need to prudently use public resources in order to maximize social benefit.

Read more: On Zambia’s prospects for further IMF support by Bright Chizonde

Let me define the concept; Opportunity cost is the value of the next best forgone alternative, with respect to the utilization of a resource. So, if the money government collects in form of taxes was not collected, where would it be? What would the owners of this resource use it for? That is the opportunity cost!

With respect to tax revenue, there are two main sources and therefore two key opportunity costs:

(Reduced Household standard of living. Imagine that from today, you start getting the gross pay and not the net pay due to no more PAYE or income taxes, and further, the price of all goods and services are reduced by 16% since there is no more VAT. Imagine that there are no import taxes, you can now just purchase a car or anything and not pay any taxes.

How much would your life improve? What would be the increase in your standard of living? This is exactly what you are forgoing or losing because government has collected this money for its operations and to provide public services.

Reduced Private Sector Benefits and production

If government stopped taxing the private sector businesses, they would be more profits for reinvestment. This would therefore act like a stimulus and lead to more production of goods and services, more employment and lower prices of goods and services.

Taxes are therefore gotten from the households and private sector in order to finance government activities and have a huge opportunity cost.

Government should therefore utilize this money well. In fact the benefit of improved public service delivery at those councils, the provision of medicines in hospitals and so on, must be greater than this opportunity cost.

In other words, an inefficient government, full of ignorant public officials seeking to maximize their own benefits, using expensive public resources, does more harm than good.

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