Liberia's Top Secret Tax Rates Jude Wanniski July 9, 2003

Memo: To Treasury Secretary John Snow
From Jude Wanniski
Re Liberia’s Economy

While the President is still contemplating sending U.S. forces to Liberia in the midst of its renewed civil war, I think you might suggest a more felicitous approach to bringing peace to that deeply troubled country – one that would be much less expensive. I’m talking about economic assistance of a special kind, one that could quickly lift Liberia from the poorest country in the eastern hemisphere to one of peace and prosperity. It occurred to me the other day when I went on an Internet search, trying to find information about Liberia’s income tax system. I was amazed that none of my searches turned up any hard data on the country’s tax structure, although I did find that its 3.3 million people have a per capita Gross National Product of only $188 and the total government revenues amount to a mere $70 million per year. Of that amount, only $6.7 million comes from income-tax collections, with another $7.2 million in corporate and partnership taxes. Here is the brief summary of Liberia’s troubles in the CIA world book:

A civil war in 1989-96 destroyed much of Liberia's economy, especially the infrastructure in and around Monrovia. Many businessmen fled the country, taking capital and expertise with them. Some returned; many will not return. Richly endowed with water, mineral resources, forests, and a climate favorable to agriculture, Liberia had been a producer and exporter of basic products, while local manufacturing, mainly foreign owned, had been small in scope. The democratically elected government, installed in August 1997, inherited massive international debts and currently relies on revenues from its maritime registry and timber industry to provide the bulk of its foreign exchange earnings. The restoration of the infrastructure and the raising of incomes in this ravaged economy depend on the implementation of sound macro- and micro-economic policies of the new government, including the encouragement of foreign investment. Recent growth has been from a low base, and continued growth will require major policy successes and containment of armed rebellion.

I’m sorry to say the CIA website does not provide any information on the tax structure, but I would have to assume that with all the inflation of recent years, tax rates both personal and corporate are confiscatory. In years past, I’ve always been able to go to Price Waterhouse for specific information on country taxation, but there is so little call by investors interested in doing business in Liberia that they have stopped collecting information in Monrovia, the capital, and have no office there. The same is true for the other accounting firms I have checked. Some years back, the State Department began a practice of assembling tax data of this kind, but the man I reached on the Liberia desk told me they had no information of that kind, for the same reason I got from Price Waterhouse in New York City: No interest by American investors.

The International Monetary Fund must have this information, so I called and asked for the Liberia desk, where I was told that such information is confidential. No kidding. I would have to get it from the Liberian government directly. But when I called the embassy in Washington several times yesterday and today, asking for the economic attaché, I could get only answering machines and no return calls. If past experience with embassy staffs is any guide, the attaché would not have the information anyway. Your Treasury Department always tries to be helpful, and the fellow at the Liberia desk at State suggested I might hit pay dirt there, and gave me a number to call. A very pleasant fellow heard my plea and said he would try to get the information from the IMF. This morning he e-mailed me:

*****

Mr. Wanniski,

Thanks for your e-mail and your call this morning. Sorry for not getting back to you yesterday. The IMF has done some work on categorizing the various tax structures, delineating the rates and the exemptions and deductions. However, as you can well imagine, IMF documents are considered confidential, so I am unable to release it to you. I would have to refer you to the IMF to get the release, but you had indicated in our conversation that you had already tried that avenue. The Staff Report of the 2002 Article IV review for Liberia is available at www.imf.org (search for Liberia and the Art. IV will be one of the possible documents).

Revenue collection has been a problem in Liberia for some time, so that document would undoubtedly have a discussion of the topic. As you are no doubt aware, corruption, inefficiencies, exemptions and weak enforcement are all largely to blame for Liberia's poor record on revenue collection. In such a poor country, the national income tax and even the national corporation tax are not major sources of revenue, but rather taxes on imports, forestry products and maritime revenue are where the limited income comes from.

Sorry to not be able to help more, but if you poke around on the IMF webpage, you may find some additional information.

*****

Dear John…. As you are now the leading supply-sider in the Bush administration, who I largely credit with getting the terrific tax package out of Congress, I think you could see the implications of this memo. In the above note from Treasury, I’m told the reason there is so little revenue from income tax is that the country is very poor. But one of the major reasons why a country becomes very poor is that its government either increases tax rates to confiscatory levels, or inflates its currency so that the tax rates soar through bracket creep. I think both have hammered Liberia.

The armed conflict in Liberia, I submit, has been the direct result of the international financial institutions feeding poison to its government. President Bush has been as poorly served in his approach to Liberia -- with miserable economic intelligence, as he has been with Iraq -- with dreadful, massaged intelligence on “weapons of mass destruction” that do not exist. So he blames Liberian President Charles Taylor, who unlike Saddam Hussein was democratically elected in 1997. Mr. Bush now demands that before the USA will help, Taylor must resign and go into exile. I'm not at all sure it is necessary for our government to take sides in a civil struggle, especially when I expect the unintended consequences might be as nasty as they continue to be in Iraq.

In the briefing book President Bush probably has with him on Air Force One, it may inform him that Liberia owes $3 billion in foreign debt, including $1.2 billion to the IMF and World Bank. It could never pay down these debts, which continue to grow as there is now hardly any government funds available for basic internal needs, including pay for the army. Of course, if Liberia could be instructed on the correct tax policies needed to grow, with a bit of help from the United States, the $3 billion in foreign debt could be easily managed. Think back on how the Taylor government only gets $6.7 million in personal income-tax receipts, for example. Air Force One will burn through that in jet fuel, not to mention all the other related costs of presidential travel. We could actually give Liberia the $14 million it takes in every year from both personal and business income taxation for the next five years, while it gets back on its feet. The only reason the various tribes are killing each other, John, is because of the shortage of calories. A falling tide sinks all boats.

I have several other ideas on how to get Liberia booming with very little expense on anyone’s part, but this should be enough for you to chew on. There would be no need to send in troops or kick President Taylor out of Monrovia – moves that could send the dollar meter into the billions. I’ve actually been making these kinds of arguments at Polyconomics for 25 years… and I’m sure you remember me making them in 1977 when we were both fellows at the American Enterprise Institute. You at least have enough standing, as U.S. Treasury Secretary, to get your hands on these “top secret, confidential” tax reports that are forbidden me. At least I hope you can. Good luck.

Jude