It is fine to tax gambling but let us end this casino economy

A fortnight ago, this column marvelled at the mysterious disappearance of a thousand kilometres of road built by the Jubilee administration between last year’s and this year’s State of the Nation addresses.

I have more bad news. Between the State of the Nation address and the Budget Speech the gremlins have eaten another 450km.

The Budget speech ritual may not be what it used to be in the era of price controls when the briefcase contained secrets that could make one rich overnight, but it is still an event that decision makers take seriously.

In fact, sexing up the State of Nation address, as unseemly as it is, may be a lesser evil than alternative facts in the Budget speech.

READ: Uhuru's State-of-the-Nation address

The more remarkable thing in my view is the lack of outrage at the Jubilee administration’s cynical desecration of these national rituals, what my good friend John Githongo has characterised as the normalisation of absurdities.

Cartoonist Gado captured the Budget as only cartoonists can. He had the CS walking on a red carpet into a building emblazoned “Casino Economy” with his famous fat cat, pig and ghost-headed characters waiting to receive him and a caption that mused whether he was going in there to collect tax or to gamble.

Gado was playing on the booming gambling industry in the country, and of course, the fact that the government has slapped a 50 per cent tax on gambling revenues.

There are sound reasons for taxing the gambling industry. An excise tax on gambling meets many criteria of a good tax.

ABILITY TO PAY

First is equity. The first principle of taxation is that tax should be based on ability to pay.

The problem is that people’s ability to pay is not observable. All the things that government pegs taxes on are imperfect proxies of ability to pay.

Consider personal income tax in a scenario with two people who both earn Sh50,000 a month.

One is the sole bread earner of a large family, the other is a young college graduate who is still living with her parents.

The observed income is the same, but the ability to pay is vastly different.

The sole breadwinner can hardly make ends meet on her income, while the young college graduate can blow half her salary on fun.

Personal income is thus a bad proxy for ability to pay. Money gambled is money that the gamblers are willing to lose, in fact, most of them lose it.

Gambling is a dead giveaway to the taxman that there is ability to pay out there that he was not previously aware of.

In economics we call this a revealed preference.

READ: Rotich's gamble a big miss — Midiwo

The second reason is that taxes distort incentives in the economy. Taxing profits, incomes and wealth distorts investment and work incentives.

Taxing trade is even worse. Taxing consumption is in most cases the lesser evil.

Third, when imposing a tax government has to weigh the cost of collecting it.

A tax may be a good by economic considerations but very difficult to administer.

The new gambling industry, particularly the mobile phone-based betting, appears to be a relatively easy and cheap tax to collect.

TAXABLE GAMBLING
Fourth, gambling belongs, with alcohol and tobacco, to the category we call “sin” taxes, so called because taxing them punitively is unlikely to be politically costly, as would be for instance taxing food.

When the government is under political pressure to give tax relief to politically important constituencies and needs to balance the books, sin taxes are the way to do this.

The arrival of taxable gambling is, therefore, a good thing because it broadens the sin tax base.

This should be good news for the alcohol and tobacco industries who have been suffering the sin tax burden on their own.

With a bigger sin tax base, they can make a case for lightening the individual burdens, although there is no guarantee that they will succeed.

The government may gleefully choose to tax all of them punitively.

But of course, even a tax with so many merits can have unintended consequences.

The CS justified imposing a punitive tax as meant to reduce social harm; the expansion of gambling he said, “is beginning to have negative social effects, in particular on the young and vulnerable members of our society”.

One possible consequence is that rather than being a deterrent, the tax will be passed on the gamblers, who will in turn spend more money, some of which will be diverted from important things such as milk and eggs for the children.

Another unintended (or perhaps intended) consequence is that such a punitive tax increases the incentive for the gambling companies to evade tax.

Some of the gambling operations will go underground, with well-known consequences; more corruption opportunities for tax collectors, law enforcers, organised crime and the rest of it.

Gambling is an escapist leisure activity, like getting drunk or smoking a joint.

They are harmful done in excess but so too is bingeing on food. That a number of people will binge themselves to misery or death is inevitable. C’est la vie.

The CS shoots himself in the foot when he takes the “sin” in the tax literally.

Although he should not show too much glee openly, his preoccupation ought to be, as one French finance minister of yore put it, to figure out how to pluck his new goose “so as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

The biggest casino in Kenya is public procurement. Government offices can send someone to the shops to buy stationery like the rest of us do.

Too simple. They sell lottery tickets (tender documents) to a lot of people and whoever wins the lottery gets to supply the stationery.

COMPETITIVE BIDDING

These people are not stationery merchants. They sit in cubicles in Gill House and similar buildings in downtown Nairobi scouring newspapers for procurement notices and filling out tender documents on anything and everything that the government wants to buy.

Once they win a tender, they source the goods from the real merchants and deliver.

I don’t know what the odds are but I would imagine for general supplies, the competition must be very stiff.

In a fair gamble, and these are few and far between, I would hazard a guess of one out of 50.

The costs incurred in failed bids are loaded on the few that a tenderpreneur wins, making the goods more expensive than if the government had gone shopping.

The irony is that the whole point about competitive bidding is to get the most value for money, but the government ends up paying more, after both the government and the tenderpreneurs expend a lot of otherwise productive time and effort on a process that does not add value.

CASINO ECONOMY
Like all gamblers, every tenderpreneur’s dream is to hit the jackpot. Hitting the public procurement jackpot is the ultimate game of chance.

A hairdresser hits it off with a client who is going places. Jackpot. An enterprising welder with a side hustle in Gill House that happens to be tailor-made for a mega air supply deal that his higher ups are plotting. Jackpot.

In economics, we call this casino economy Directly Unproductive Profit-Seeking (DUP) activities.

The term DUP was coined by trade economics luminary Jagdish Bhagwati. He defined DUPs as “ways of making a profit (that is, income) by undertaking activities that are directly unproductive; that is, they yield pecuniary returns but do not produce goods or services”.

DUP is related to, but not the same as, rent-seeking. Technically, rent-seeking refers to activities that create a degree of monopoly power through protection or regulation, thus enabling the producer of a good or service to earn more than they would in a competitive market.

The real gambling economy is not a DUP because, as noted, it is a leisure activity for the consumers.

If it were, Las Vegas and Macau would have gone bust a long time ago.

The issue with DUPs, as Bhagwati explains, is that they “use real resources”, which result in “defined reduction in the availability set open to the whole economy”.

Simply put, the productive economy is deprived of the time, effort and materials used up in the DUPs.

ENTREPRENEURSHIP
Just how much the economic cost of the procurement public DUP? It is a difficult question as we would need to know how much resources it consumes.

An illustration will suffice. Suppose 20 tenderpreneurs spend the equivalent of a working day each on a tender worth Sh100,000.

That is the equivalent of a full working month for one person expended in worthless work.

The current average salary is Sh50,000. That is the opportunity cost, in other words, what the society would have gained if the tenderpreneurs had been doing valuable work instead.

How many tenderpreneurs do we have out there doing this valueless work, a hundred, 200,000? A hundred thousand works out to an annual cost of Sh60 billion.

Not too long ago, I was a guest speaker at a university students conference on entrepreneurship.

One of the topics on the agenda was the government procurement initiative for the youth.

When it was my turn, my response went something like this. Public procurement is not entrepreneurship.

An entrepreneur is someone who spots an opportunity in the market and figures out a way to tap the opportunity.

This might be how to produce something cheaper, or of better quality or how to commercialise an invention.

Whatever the case, entrepreneurship entails innovation.

Winning a lottery to supply soap to the government, buying the soap and delivering it is not entrepreneurship.

Instead of inculcating in our young people the value of productive work, making soap for instance, the government is encouraging them to grow the casino economy.

email: [email protected] Twitter: @DavidNdii