Taxes in Benin - Then and Now
It might not seem unusual to hear an entrepreneur complain about taxes. Indeed, it would be most unusual if you would meet one that does not. However, do modern-day entrepreneurs in Benin have more reason to complain than their ancestors in the pre-colonial kingdom of Dahomey?
The pre-colonial kingdom of Dahomey (in the south of modern-day Benin) had a tax system in place that rivaled that of any modern-day western country (whether this is something to be proud of is another matter, of course). Let’s have a look at how their tax system compares to what Doing Business measures today: number of taxes, tax rates and time required to pay the taxes.
First, today there are 15 different taxes in Benin ranging from the corporate income tax to the tax on the collection of dirt. In Dahomey, traders would have sympathized. They had to endure separate taxes on the sales in markets, on entries into the kingdom, on the crossings of rivers, on agricultural production and on cash incomes (in addition to the inheritance tax and the flat tax on all adult males). (Edna Bay, Wives of the Leopard: Gender, Politics, and Culture in the Kingdom of Dahomey, p.122)
Second, today any formal business in Benin that lives up to its obligations pays a staggering 73.3% of their profits in taxes. Two hundred years earlier, in the kingdom in Dahomey, the tax on cash income was estimated at about one third. It is impossible to know what the total tax was as a percentage of profits (after all Doing Business only began counting in 2004). However, given the amount of different taxes, this number was bound to be much higher.
Third, it takes today in Benin some 270 hours to prepare all the forms and submit them. Entrepreneurs in Dahomey, however, could only dream of that. For them paying their taxes meant traipsing in person to the capital Abomey. There, besides paying their taxes, they had to spend many weeks at the Annual Customs in order to watch all the ceremonies (such as the one pictured here). One trader in the middle of the 19th century even complained that his year’s income would be blown in the expenses associated with the trip. However, given that he traded in slaves, our feelings of pity might be mitigated.
So, what of this cross-era comparison? Does it mean that the current tax system has embedded roots and that a reformer would be ill-advised to try to change it? Or, does it mean to the contrary that the time has come for reform once again?
Comments (11)
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Did Dahomey citizens gain many benefits from these taxes? What about the current citizens of Benin? Is there a difference in how Dahomey and Benin spent these monies? High taxes are not the problem, but inefficiency in collecting and spending them could be.
Many societies today make a conscious trade-off, paying higher taxes to reap the benefits of high quality education, infrastructure, and other public goods. They trust their governments to spend taxes wisely. Was Dahomey and is Benin trustworthy in this sense?
Posted by: Katrina | Feb 5, 2008 11:39:56 AM
Regarding your question, one would have to examine the genealogy of the present-day tax system to determine if it reflects some cultural bias toward high taxes- and in particular, determine if the tax system is performing the same function in the present day as it did in Dahomey.
Based on your description of Dahomey's taxes, it sounds as though an explicit function was not merely fund-raising but social control- ensuring that all profit-makers retained a central social connection to the capital. Of course, one could make the argument that given how much paperwork is required by contemporary Benin, the same centralizing, perhaps pacifying/socially regulating function is performed, albeit in a more indirect fashion.
Posted by: JME | Feb 5, 2008 11:53:46 AM
Dear Lior,
Compelling historical comparison...
In the following, I will only focus on the time gains in paying taxes in Benin. A major leap forward and a tremendous gain in time efficiency one would say.
Yet, aren't we comparing pre-colonial Benin with current day Benin through the prism of our current political-ecomomic thinking? Today time efficiency is key. Political institutions such as paying taxes should be designed such as to smoothen and incentivize ecomomic transactions. This will enhance economic growth, maximize welfare and transform society as such. To put it shortly; the paradigm we live in, the paradigm we breath is one of change.
Probably, but correct me if I'm wrong, that was not the case in pre-colonial Benin. Society had a much more static outlook and was structured around fixed rituals. These rituals were of many kinds and served various purposes. "Rites de passage" or rituals expressing the human fear for nature are commonly known. But also rituals expressing the power of the sovereign have a key role in static societies. Imposing taxes has always been one of the most important prerogatives of the sovereign. The ceremony you describe probably serves as a means to legitize and mystify the power of the sovereign. This way, paying taxes becomes a grave state affair, something natural and unquestionably part of the society of the pre-modern man.
Questioning the process of paying taxes from the point of view of time efficiency is a radically modern question, and would have sounded ab-surd in pre-colonial Benin. The aim of making taxpayers come to Dahomey and making them go through all kinds of ceremonies was not to bully taxpayers, as we would see it now. It was rather a transformative ritual through which the sovereign actually exercised his power over his subjects.
Therefore, these time-comsuming ceremonies made sense in pre-colonial Benin, whereas admittedly, they wouldn't make much sense now. To consider the gain in time in paying taxes as an improvement would sound strange in pre-modern Benin, since the phrasing of the question presupposes a -unescapable- endorsement of today's values on good politics and the good society.
Kind regards,
Dries Cools
Posted by: Dries | Feb 5, 2008 11:59:48 AM
Lior, my analysis of your intriguing question will reveal my leanings towards a utilitarian perspective of tax reform which begs me to ask the following questions "does [X] result in the greatest common good" and "is government properly oriented to answering the common good with an optimized system".
While I feel that reform for a better and more efficient system is almost always warranted, I believe that the rationale for reform, and the indicators that point towards the need for reform, are always integral to one's analysis. Doing Business provides a comparison based on certain data sets which, as you said, includes number of taxes, rates of taxes and time required to pay the taxes. I notice that it lacks important data in the sense that the measures fail to indicate the onus of the tax, i.e., were the taxes progressive or regressive - did they tax individuals with more capacity higher than they did those with less earning capacity AND could the taxes be shifted to end-users. The answers to these questions ultimately show us the measure of financial burden to the subject taxpayer and the society within which such taxpayer is situated. I feel that this should be the first step in analyzing the need for tax reform.
On the regulatory burden of tax filing and payment: one needs to ask what general objectives the government of Benin desires to achieve with its tax system. While the move to efficiency is a proverbial good, reforming the tax payment system to attract potential international investors is a greater impetus for government consensus to change than the desire to alleviate regulatory burden on what is essentially a historically captive domestic market.
Posted by: Harvey | Feb 5, 2008 12:56:47 PM
How do the two structures compare in terms of who the structures tax most heavily? lightly? Is one system better suited to allow for upward mobility of individuals? Are there any tax write-offs that you found particularly interesting?
Posted by: Lindsay | Feb 6, 2008 3:56:41 AM
Heh, I'm writing off a trip to Benin
Posted by: Andrew | Feb 6, 2008 9:01:48 PM
An interesting question would be how the taxes were spent in Benin the past vs. now. Though no entrepreneur (or anyone indeed) likes to pay taxes, if they are put to good use for society, everyone benefits, even businesspeople. Becoming self sufficient unavoidably means that developing countries need to develop sources of domestic income.
Posted by: Guus | Feb 7, 2008 3:40:19 AM
A tax on collection of dirt? In my country there is a tax called DIRT - deposit income retention tax, so maybe the cultures have something in common. It would seem from Ziv's overview that reform is indeed required. Here in Ireland by cutting certain tax rates (e.g. corporation tax) the accumulation of revenue increased. A similar effect could be replicated in Benin by cutting certain taxes entirely. That's not to go the whole hog and advocate a flat tax as some in the US do. However there are enough disincentives in the minds of certain people and businesses to paying tax already - these should not be added to by the difficulty of the process itself. In an arena such as tax collection cultural considerations should not be a bar to the onward march of efficiency.
Posted by: Francis | Feb 10, 2008 12:14:34 PM
But what does efficiency mean? Should tax systems aim simply to maximise revenue? Might a more efficient system be structured with social and environmental objectives in mind? A carbon tax, for example, could reduce the need for regulation of energy use. Perhaps Dahomey's taxes on dirt, river crossings and agricultural production were beneficial for the environment. Are Benin's taxes today more efficient in this sense?
Posted by: Amelia | Feb 14, 2008 1:48:27 PM
My Friend Mr. Ziv,
I suppose the next logical step in your analysis is a cross-era comparison of GDP and rates of growth. A more practical exercise, however, and one which I'm sure the World Bank has done, may be to compares Benin's current economic data to that of its neighbors. I suspect your employer has found that Benin's relative rate of growth next to its neighbors reflects its relative tax burden relative to those same states.
I doubt quite seriously that the entrepreneurial class in any society displays a cultural bias towards higher tax burdens or willingly chooses higher taxes in exchange for the provision of government goods and services. If you're aware of studies which indicate a beneficial social impact of relatively higher taxes on entreprenuers -- be the measurement GDP, rates of growth, per-capita income, standards of living, levels of employment, etc. -- please let me know.
Keep up the good research.
Posted by: NCK | Feb 16, 2008 5:07:00 PM
Thank you everyone for the numerous interesting comments. A short reaction seems in place:
1. HIGHER TAX RATES IN EXCHANGE FOR MORE SOCIAL GOOD. This is a theme that is often repeated in the comments, maybe a society consciously chooses to have higher taxes to provide more social good. Firstly, this does not address the ‘paperwork’ indicators of time and complexity associated with tax payments. Therefore, even if a society consciously chooses for higher tax rates in order to provide more social good, it would seem that only bureaucrats would prefer more paperwork, for this is probably the opposite of a social good. Secondly, maybe tax rates can indeed lead to more provision of services, and this is indeed always the million dollar question: are the services worth the taxes? For Dahomey, the revenue was mainly used to support the administration and the monarchy itself and to pay for the army, which back then was a necessity were the state to survive. Thirdly, Doing Business believes that what is immovable should be taxed (called also ‘the inelastic side of the market’) because as a result of higher taxes businesses can either move, stay in the informal sector or not come into being at all. Therefore, if you need revenue, tax then consumption or income. (this addresses also Harvey’s point on ‘captive domestic market’ as being incorrect) Fourthly, Doing Business measures in any case the effect on entrepreneurs, believing that if the private sector fares well, society will fare well.
2. TAXES AS SOCIAL CONTROL. Indeed, what JME and Dries said is very true. From the point of view of the state, the taxes also served a social control function in Dahomey. However, Doing Business is concerned with the point of view of entrepreneurs. And there I would contend that even 200 years ago in Dahomey, entrepreneurs did care about the efficiency of tax payments and resented tax as social control (which also blends in with the second part of NCK’s comment).
3. PROGRESSIVE TAXES OR NOT? Harvey and Lindsay both mentioned this. Both then and now income tax was and is progressive, however, tax on corporations seemingly not. (even though the limited liability company did not formally exist in Dahomey, so someone’s business earnings were also his personal earnings, there was a separate collection of taxes on production or business earnings in Dahomey)
4. TAXES AND GROWTH. NCK, your comment is very timely as we just published a paper suggesting a link between effective corporate tax rate and entrepreneurial activity. You can find it here: http://www.doingbusiness.org/documents/AEJ-Manuscript.pdf.
5. EFFICIENCY. Amelia’s question as to what efficiency means; here efficiency means the ease of paying taxes for the entrepreneur as regards to time, cost and effort. As you say, it would also be very interesting to look at what taxes are efficient for the state. If a tax could eliminate the need for another regulation that would indeed be efficient. Indeed one could think of a new set of indicators measuring the efficiency of regulation from the point of view of government. Welcome to the new sister project of Doing Business: Running government!
In any case, do let your comments keep coming in and I will react to them.
Posted by: Lior Ziv | Feb 22, 2008 5:27:46 PM