#4 The Tax Base and the Dependency Ratio in the Less Developed World

The Tax Base and the Dependency Ratio in the Less Developed World
By Sampson Yao Akligoh

Less developed countries dramatic, but sympathetic economic woes, as evidently clear, stemmed from
policy-driven failures in the past. Incidentally, as their struggle for economic development continues
unabated, it is an inevitable necessity that prudent economic policies are needed for the attainment
of their developmental goals.
Indeed, underdeveloped countries over reliance on international financial institutions such as the
World Bank and the more developed countries for monetary assistance, is primarily because of their
inability to generate enough domestic revenue.
Of significance, tax revenue generated in these economies lag far behind public spending: put by
Baah-Nuakoh, tax ratios in Ghana, like all other less developed countries are low. This he said reached
a lowest of 5.1 percent in 1980-81in Ghana (Baah-Nuakoh, pg 267).
Since the principal source of every government's revenue is taxation, their have being frantic calls by
economists for a broader tax base, as well as, rate of tax increments to enhance the balancing of the
public sector borrowing requirements (PSBR) in these economies.
Obviously, with high income elasticity of demand economists view public spending and services as
'normal'; as it is necessitated by 'the pressure of social progress' which intend creates tensions that
could only be resolved by increase state spending in law and order, economic and social services and
the state's participation in material production (Wagner, Bird 1971).
The question, therefore, is that why are governments of these economies unable to yield to the calls
of these economists or even curb, to a large extent, the heavy subsidization (negative taxation) of
some essential commodities like electricity, education, petroleum, and water and consequently foster
their citizens to pay economic or realistic prices for them; or as it is of debate privatize them?
The fact is that, regardless of a country's size, natural resources, or level of development, countries
with large population and high birth rates, with it associated low death rates face increasing
problems. Less developed economies ever decreasing mortality rates due to improve health care and
standard of living, and an all time high birth rates, resulting from traditionally high fertility rates,
has led to explosive dependency ratios in these economies.
Kenya, for instance, has a high birth rate of 41 births per thousand of its population and an everdecreasing death rate which stood as low as 12 deaths per thousand of its population in 1995; as
compared to Germany which has a birth and death rate of 10 and 12 per thousand of its population
respectively in the same year (Martin Schnitzer, page 418.)
Obviously, with a traditionally high mother to child ratio averaging about 7 children to a mother and a
falling mortality rate from about 24 in 1960 to 17 per thousand persons in Ghana by 1979 (BaahNuakoh, pg 213), extended family practices, just to name a few, most less developed countries have
significantly high dependency ratios. Statistics indicate that whiles the developed world have about 2
dependants to a working person, that of the less developed world is about 6 dependants to a working
person (Martin Schnitzer). This alarming demographic feature has been the concern of some wellmeaning demographers with regard to it effects such as overcrowding, among a lot. However, the
economic argument is that this high dependency ratio has left these economies almost destitute in
domestic revenue generation.
Observably, as the 'not in my country' (nimcy) outcry continues, as evident in the recent Nigerian oil
price strike and the 1995 'kume preko' march in Ghana that resulted in the death of about 7 people;

the battle for an improve tax system to enhance government developmental goals have essentially
being a lost cause. The truth is that, "all things being equal, there is an inverse relationship between
the tax base (broadening or rate increment) and dependency ratio in these economies" as virtually
everyone is in the poverty trap- a situation where a person on low income may gain very little or may
even loose from an increase in gross earnings (Griffiths & wall, page 415).
In fact, anytime governments of these economies imposes an additional tax on their citizens, a little
food is taken away from the table of most households and people go to bed in each instance a little
bit hungrier.
Of demographic distinction, rural populations in these economies are typically the agrarian type.
With labour as the dominant factor of production aside traditional tools of hoe and cutlass, it is a
firmly established tradition that many children are born to add hands to farm works. Undoubtedly, a
farmer gives birth to an average of about 10 children; but ironically, production is barely above
subsistence and no essential economic gains are made. For example, whiles an American farmer on the
average produces to feed himself and about 20 others, his Ghanaian counterpart produces to feed
himself and about 3 others (Lecture modules, Economy of Ghana). With many dependants to look
after, it is clear that any attempt by government to tax their already starvation incomes will be
chronic to their welfare and thus rejected.
The ever-increasing urban population also left much to be desired with regard to an additional tax
tolerance or burden. Extended family practice, as it pertains in most of these economies especially
Africa, create a situation where a single urban dweller is dependent on by most of his relatives. With
the notion by rural folks that urban dwellers are 'five meters away from heaven.' They are basically
leaned on for financial helps such as the paying of school fees, among others, in the mist of rising
cost of living.
With relatively about five dependants on a single worker in addition to his immediate family, the
consequences are that this high financial burden will necessitate every calculated effort to resist any
form of an additional tax burden being it beneficial or not.
This severe dependency burden has actually incapacitated these economies from implementing
prudent macroeconomics policies to follow the "positive economics" trend as expected and advocated
for by multinational institutions such as the Breton Wood institutions. As 45% of Ghana's population
was below 15 years in 1984, with an ever-rising cost of living, food, education etc, it is becoming
increasingly difficult for governments to raise revenue or cut its expenses without any effect on the
citizenry.
For instance, as the marginal productivity of each university graduate student in Ghana continues to
decline and graduate unemployment swells up. It is 'positive economics' that the heavy subsidization
(negative taxing) of fees by the state be minimized, and the fees allowed to move towards their
'market price' for the system to ration. Despite persistence calls by the World Bank, for various
governments to stop the extreme distortions in the system, they all did not adhere to these calls in
any mean way; the truth is that the social milieu, in terms of the high dependency burden, will not
permit government as "political beings" rather than "economic beings" to yield earnestly to these
calls. Indeed, as mass poverty exist and the basic consumption needs of many remains unfulfilled,
making the magnitude of poverty all too apparent (Martin Schnitzer, pg 277) many will be 'crowded
out' of the educational system if these calls are implemented, eventually, resulting in lost of valuable
human resources.
In addition, if these calls, however, are met as it pertains in some of these economies now, the
effects will be high tax fraud in terms of both tax avoidance and evasion. Which will incidentally
undermine government concerted efforts in raising tax revenue. Ghana, for example, loosed an

estimated 32 percent of official gross output in 1982 through smuggling, which is a clear instance of
tax evasion (Ghana's Adjustment Experience, The Paradox of Reform; Eboe Hutchful).
This boom in the black or underground economy, is not surprising as people will be induce by the high
dependency burden to undergo this risk to enable them bring enough food to the table of their
homes. On the other hand, governments have to use their already scanty revenue to fight this fraud.
Of course, in economics sense, since the marginal social benefit of indulging in this fraud surpasses
the marginal social cost of being punish, which the high dependency burden seems to induce, it is
worth committing them.
In this light, I would humbly submit that the development of an effective tax base, in terms of the
broadening of the tax base, as well as, rate of tax increment will bring and has brought untold
hardships to many in the less developed world. And as the 'not in my country outcry' (nimcy)
continues, the battle for an improve tax system to enhance the balancing of the public sector
borrowing requirement (PSBR) will essentially be a lost cause if this vital demographic feature is not
checked. Clearly, the higher the rate of dependency, the greater the strains on family budgets and
the national economy. Indeed, this draws on all policy makers in these economies to make policies with
regard to the domestic environment in which it is to be implemented.
As demographic factors affect every economy, third world countries economic woes cannot be solved
unless the prerequisites to an effective economic policy making are put in place.
REFERENCES
Comparative Economic System; Martin C. Schnitzer, 7th Edition.South-Western College Publishing.
Applied Economics, an introductory course; Alan Griffiths and Stuart Wall,8th Edition.
Pearson Education Limited.
Studies On The Ghanaian Economy; A. Baah-Nuakoh, Volume One. Ghana Universities Press, Accra.
This was an entry for The 2004 Moffatt Prize in Economic Writing. See the contest rules for
more information.
http://economics.about.com/cs/moffattentries/a/tax_base.htm