Unmasking the Devil on Inflation Adjustment

By: Atty. Al-Varney Rogers
A Public Interest Lawyer and Journalist

Email: alrogers2008@gmail.com   

Taxation is a fundamental aspect of any modern economy, playing a crucial role in funding government operations, public services, and societal development. While paying taxes may sometimes seem burdensome, it is important to recognize the underlying economic rationale behind taxation. It must be noted that while rationale is one thing, it's up to governments to best implement taxation policy and then utilize collections effectively to get the best outcomes of the revenue generated.

Article 34 of the 1986 Constitution, grants legislative powers to the legislature concerning taxes.

“The legislature shall have the power to levy taxes, duties, imports, exercise, and other revenues, to borrow money, issue currency, mint coins, and to make appropriations for the fiscal governance of the Republic.

The Constitution does not delegate to any other branch of the government any authority to impose taxes except the legislature. 

As such, the Liberia Revenue Authority (LRA) and the Revenue Code (Liberia Revenue Code) became creatures of the legislature with the sole purpose of collecting lawful taxes. 

There are many ways our government can raise money as enshrined in the Revenue Code, only one of which is to tax its own citizens and foreign residents on their income. As such, the government endeavors to spread the burden more evenly by taxing (most of) its citizens or residents.

Section 200 of the Code is perhaps the most comprehensive statement of the Liberia Revenue Code. It affects everyone with an income. It affects everyone with a job. The Code defines broadly the income on which it imposes a tax. It provides exceptions to these rules for those taxpayers the legislature deems deserving of exceptions. 

Section 200 (a) of the Code says an annual income tax is hereby imposed on the annual taxable income of every natural person resident in Liberia (including resident Liberian citizens employed by an embassy, a diplomatic mission, or an international organization). 

Section 201(b) of the Code says a gross income for income tax purposes means the aggregate of all income earned, from whatever source derived by a taxpayer during a tax year. An example of gross income is earnings from employment. In his 2024 updated article, “What is Gross Income?  Definition, Formula, Calculation, and Example”, Will Kenton defined gross income for households and individuals as the ‘total amount earned before taxes or deductions’. 

Recently, the government has used income tax to boost its domestic revenue generation ignoring inflation adjustment thus making the bulk of its citizens working poor. 

Liberia Revenue Authority Annual Report (2020-2021) says the actual collection on income and profit for the period amounted to US$176.10 million, up by 36 percent against a recast budget of US$129.7 million, representing a 15 percent increase in comparison to FY2019/20. Under this category, Personal Income Taxes recorded the highest outturn to the tune of US$141.3 million, with a variance of 33 percent against its recast target. The high performance is mainly on account of withholding taxes on residents and taxes on non-residents. The Government’s reliance on the personal income tax as a source of revenue has increased. 

Over thirteen years, the Minister of Finance and the Liberia Revenue Authority have yet to make an Inflation adjustment for the Payment of personal income taxes even though the Revenue Code and the framers made provision for it.  

Liberia Revenue Code Section 8 says, If during a calendar year, the average market rate of exchange between U.S. and Liberian dollars changes by 10 or more basis points from the average rate prevailing for the preceding calendar year, the Minister of Finance Development Planning shall make an inflation adjustment to the Liberian dollar amounts set out in the Code. 

“The determination that the requisite change has occurred in the average annual market rate of exchange is to be made by the Minister of Finance Development Planning by January 31 of a calendar year, regarding the preceding year and by comparison between that preceding year and the year immediately prior to it. If the Minister determines that the requisite rate change has occurred, then the inflation adjustment is to be made and is to be effective for the current calendar year and, with respect to taxpayers using a fiscal year, for any fiscal year ending after June 30 of the current calendar year. The amount of increase or decrease in the Liberian dollar amounts stated in this Code is to reflect the proportionate change in the average annual rate of exchange as determined by the Minister, but amounts may be rounded off.”

Interestingly, the overall tax-to-GDP ratio of 18-20 percent is quite a bit higher than most comparator countries and compared to countries of similar income levels. The personal income tax produces surprisingly high levels of revenue. At the same time, the corporate income tax manifests rather lackluster revenue performance.

Regarding the income of residents, they are as follows: Income up to LRD 70 000 – 0%; From LRD 70 000 to LRD 200 000 – 5%; From LRD 200 000 to LRD 800 000 – 15%; Over LRD 800 000 – 25%. 

 The Central Bank of Liberia reported on Thursday, July 5, 2012, the exchange rate of L$75.0000/US$1.00 while on Wednesday, February 21, 2024, L$191.5138/US$1.00 the changes in the average market rate from 2012 to 2024 has grown considerably more than 100% and sadly the tax base remains at 70,000 LD. 

The tax base is what it is the government tax. The rationale behind the exemption is 70,000. LD and below annually are not taxable is a legislative grace that such amount isn’t accession to wealth owing to the fact that the exchange rate was L$70.00 to 1.00 USD in 2011 during the amendment of the Revenue Code. 

Here’s a brief economic analysis or a clear picture in simple terms of a person who was earning 1,000.00USD which was 70,000.00LD when the rate was 70LD to 1USD in 2011, that person is still earning 1,000.00USD now with the rate at 194LD to 1USD, this means a person thirteen years ago with a 1,000.00USD salary which was 70, 000.00LD didn’t have to pay taxes but that same person with a 1,000.00 USD based on the current rate of 191LD to 1USD which is 191,000.00LD (One hundred Ninety-One Thousand Liberian Dollars) thus subjecting said person to tax. 

But the actual reality is, that a person who was earning 70,000LD/70 made 1000USD while in today’s dollars the equivalent of the same person earning 70,000/191=366.492, which is a huge blow to the person’s standard of living.

The person's purchasing power has decreased because his/her income has dropped significantly, the income has dropped by 63.35% despite the fact that the income remains fixed in Liberian Dollars.  

If the intent of the legislature thirteen years ago by setting the tax base at 70,000.00LD was to take the vast majority of the poor working class out of poverty, how come with the increase in the inflation rate of over 100% nothing has been done? 

Here’s why? This is an easy way for the Revenue Authority to appear like performing in revenue generation when the hard truth is that most working-class Liberians are being robbed by the taxing authority’s decision to keep the tax base at the same level amid rising inflation. 

 When inflation reaches significant levels, however, its effects on the tax system cannot be ignored. The best remedy is to bring inflation under control; when this is not possible, it is often desirable to adjust the tax system to inflation in some manner.

To the new government, an adjustment in personal income tax which is by law and a good fiscal tool will increase the earnings of many Liberians thus promoting economic activities. 

Finally, in times of inflation, like we are experiencing now, it only fiscally sound that the tax code must be adjusted, to match inflation.