The Taxing Taxation of Microfinance
4 April 2010 at 14:33 Alexis Ohanian 12 comments
By Alexis Ohanian, KF10 Armenia. He co-founded reddit, started a company called breadpig, and loves lavash.
A business reporter I’ve befriended here in Yerevan once told me, “There’s one thing you can guarantee any businessman in Armenia will say in an interview — just ask him if his company is profitable. He’ll always say no.”
Only profitable companies pay taxes. There’s no reason to boast about being profitable – especially when it comes time to (theoretically) pay taxes. There are some very successful businessmen in Armenia, with companies that continue to grow year after year, yet don’t ever seem to turn profits.
Not only is this a significant revenue for the Armenian government, it means microfinance institutions shoulder an extra tax burden simply because of the nature of their business.
Less money, more problems
All but the most ardent libertarian would see an obvious need for taxation (I, for one, enjoy knowing my tax dollars pave roads and put out fires). In a country like Armenia, more money in the coffers of a responsible government could mean creating more opportunities for its population, which currently employs only ~51% of its able-bodied population. But human nature is to take the path of least resistance, so microfinance institutions are easy prey for a revenue hungry government.
Because the banking system gets its Armenian Dram from the Central Bank, it has to comply with a rigorous set of procedures and reporting. That means they’re one of the few industries that must provide a rather radical level of transparency to the government. When it comes time to collect more tax money, the state can either institute an futile corporate tax increase or target the low-hanging fruit (not apricots, the banking industry, since they know they can get away with it).
Or government could enforce a just system of taxation.
Give Armenian CEOs the chance to brag about their profits (and be fairly taxed for them)
Granted, 2008 saw strong arguments for better oversight of the banking industry. But in countries like Armenia where a nascent microfinance industry is striving to put capital in the hands of entrepreneurial Armenians, the effect stifles an entire nation. Meanwhile, the “profitless” businessmen who skirt taxation may be making short-term personal gains, but in the long-term, are crippling Armenia’s economy. And it’s not just about microfinance.
It’s in a democratic government’s long-term best interests to encourage a thriving economy with a reasonable taxation system: the more financially successful Armenians it can create, the more tax revenue. Simply preserving the existing wealth of the few who control it will do nothing for encouraging any entrepreneurship. This is bigger than making it more costly for a beekeeper to get a $1,825 loan because his MFI is subjected to extra taxes and compliance requirements. It developing an anti-entrepreneurial culture.
21st Century Armenia
Income inequality isn’t the problem (though it’s a societal problem, the US has long endured it while also creating a culture of innovation). If ‘success’ means knowing the right people, aspiring business owners will find it elsewhere. Just another reason to go take their work-ethic and intelligence to another country — one that will enjoy their innovation, job-creation, and yes, tax dollars, for decades to come.
Speaking of which, there’s a giant “Help Wanted” hanging on the Statue of Liberty these days. It powered the America’s 20th century — although it gathered dust during the last Bush presidency — and it’s back to give the USA a chance to stay competitive in the 21st.
Contrast that with Armenia’s 20th century, which had genocide followed by Communism deport, stifle, and kill Armenia’s best and brightest. Don’t let Armenia itself be responsible for holding Armenia back in the 21st century.
Entry filed under: Armenia, KF10 (Kiva Fellows 10th Class). Tags: .
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3. Lena Shuster | 8 April 2010 at 14:41
Because of the tax structure in some places (in southeast Asia) many houses are left unfinished so that their owners can avoid paying taxes on them. Twas’ kind of funny to see all these houses with incomplete roofs and walls with residents in them. I don’t remember where though.
4. Peter | 7 April 2010 at 11:18
Logic and “the obvious” usually cause folk to come to logical and “obvious” conclusion, however there are nuances that aren’t obvious, such as psychology of a country and it’s people.. After being subjected to corruption under an old communist regime, it will take time for people to “trust” government. Currently they feel that they can’t trust the government officials with their tax money. They feel that government officials are corrupt. Compare that to the distrust towards the financial markets and congress in America which is suppose to be the model of democracy, it’s not hard to see why Armenians are cautious.
The solution to fair taxation in Armenia is rooted in both “propaganda” and “enforcement”, and transparency to what the government is doing with their tax money will go a long way…until then we can all hope for Utopia or try to come up with an action plan to change the “perception” of government officials being corrupt, after cleaning house ofcourse.
5. alexisohanian | 8 April 2010 at 02:22
> “Currently they [Armenians] feel that they can’t trust the government officials with their tax money.”
I don’t know if you’re an American (I am) but if anecdotal experience and polls are to be trusted, most Americans don’t trust their government officials with their tax money *either.* Yet a just system of enforcement is what keeps tax dollars coming in (notwithstanding the significant tax evasion that is still a problem).
You’re right on about enforcement being the solution, and as I believe I stated, it’s up to a government to have the will to make it so (and for its citizens, in a democracy, to demand it).
And as for spin, why not market it as strengthening the Armenian nation. Untaxed revenues that sit in bankaccounts or are spent on mansions aren’t buying more tanks or building an infrastructure to develop a robust Armenian economy.
6. Peter | 8 April 2010 at 10:20
I’m an American as well, and American’s distrust the gov with their tax money *less* than the Armenians trust theirs. Once again, there are many nuances here that need to be addressed and once addressed there can and will be a solution. However, creating an atmosphere that is perceived as less tolerable than now will only increase brain drain and an exodus. This is a great topic and I’m glad it’s being discussed, however it would be nice to as the not so old adage goes, “come to be with solutions, not problems”. The solution presented in this case is like Nike’s logo, “just do it” or Nancy Reagan’s fight against drugs during the Reagan years, “Just say no”. Yes they sound great, just do it an just say no and ya “enforce taxation”. Being an American/Armenian I also realize that a difference in culture exists, Armenians due to various historical reasons are more suspicious of authority than the majority of Americans ever have been. There lies the challenge.
7. Amy | 7 April 2010 at 09:38
…Though I should also mention that income inquality is a problem because people become more unhappy… not because they are materially worse off. Countries that allow for greater income inquality see material gains in both the lowest AND highest socio-economic populations… the exorbitant gains for the rich eventually mean gains for the poor as well.
8. alexisohanian | 8 April 2010 at 02:37
I remember this from Econ class. The adage went something like “The pie gets bigger, so even someone with .05% of it has a bigger slice.”
Materially, yes, the bottom .05% have access to more&better products, for instance, than they’d have had (relatively speaking) before 50 years of economic growth. But when countries like Sweden enjoy higher standards of living than the US (for instance) *and* a significantly smaller income inequality, it’s clear they’re not mutual exclusive. We can have our bigger pie (cake?) and everyone can eat a reasonable piece of it, too.
When Alan Greenspan calls the US inequality of income and wealth distribution a “very disturbing trend,” (1) I take heed.
The repercussions on things more important than material well-being, say, on health, are not yet conclusive (research ongoing), but a relationship does appear to exist thus far between income inequality and health. http://epirev.oxfordjournals.org/cgi/content/full/26/1/78
(1) http://www.tompaine.com/articles/2005/11/07/alan_greenspan_egalitarian.php
9. Amy | 7 April 2010 at 09:34
Actually, people who see no need for taxes usually go beyond libertarian into anarcho-capitalist territory. I’m all for taxes… low, uncomplicated, loophole-free, low, well-tracked and well-spent, (did I mention low?) taxes.
Only taxing profits of some industries is one really great example of taxation gone wrong, and you’ve done a great job outlining exactly what all of those unintended consequences are for people who can’t afford them.
10. alexisohanian | 8 April 2010 at 02:49
I was thinking in particular of Ron Paul’s consistent bills to end income tax: http://www.house.gov/paul/congrec/congrec2003/cr013003c.htm
But yes, most libertarians would probably accept some form of taxation as it is a rather broad term. I’m optimistic about this, though, because thanks to technology (let me pay and track my taxes as well as I can track my stocks online) and the coming generation in America, your vision of a simpler, more effective tax system will become a reality.
I would even welcome higher taxes at my bracket (frankly, I could use it now) but especially with a simpler, target/track-able tax system in place. A number of studies estimate we could lower rates and still make up the difference in tax dollars lost through loopholes and clever/sneaky accounting.
Thanks for the comments!
11. Fehmeen | 5 April 2010 at 00:54
It surely is immoral to claim losses in order to avoid taxes, and this practice is common in plenty of countries. One solution the government can implement is to charge these ‘high-growth’ companies Sales Tax which cannot be passed on to customers.
12. alexisohanian | 8 April 2010 at 02:50
We just need government officials to do it