Staff Writer – ZITAP has been arguing that the tax regime is hindering economic growth. With annual USD inflation at 13.4 percent, we highlight how bracket creep is affecting economic growth in Zimbabwe for ordinary Zimbabweans and for business entities.
“Bracket creep,” also called “fiscal drag,” refers to a situation where increasing inflation or increasing nominal wages push taxpayers into higher tax brackets — or make more of their income subject to higher tax rates or fixed taxes — without there being any change in the tax rates or thresholds to compensate.
Businesses, or workers, end up paying more taxes in real terms even though their real income (i.e., purchasing power) has not increased.
In recent years, Zimbabwe has experienced high inflation and currency instability. This kind of macroeconomic environment tends to amplify bracket creep effects.
Adding to the debate on Zimbabwe’s complicated tax system and the economic challenges it exacerbates, the government needs to protect taxpayers from bracket creep.
Nominal vs real incomes
If workers’ wages rise to keep up with inflation, those higher wages are “nominal” raises. But if tax brackets, allowances and exemptions are fixed in nominal terms (i.e., don’t move with inflation), then with those higher nominal wages, people may be taxed more heavily, even though their buying power has not improved.
Fixed thresholds
When thresholds for tax bands, fixed deductions, or exemptions are not regularly updated for inflation, they lose value in real terms. That means more people fall into higher tax rates or lose benefits from deductions even when modest income rises.
The more tax brackets, and the larger the jumps between brackets (especially marginal tax rates), the more someone’s average tax burden can increase with inflation if brackets are static.
Specific considerations for Zimbabwe
Zimbabwe’s recent high inflation and currency instability tend to amplify bracket creep effects. Because of inflation, nominal wages often have to increase to keep up with the cost of living. If tax thresholds and exemptions are not adjusted regularly, people are quickly moved into higher tax brackets even when their real income has not improved.
This may erode taxpayers’ purchasing power. Many workers might find that even though their pay has increased in numbers (ZIG, or local currency), their ability to buy goods has dropped; bracket creep reduces after-tax income in real terms. This will reduce consumer spending and demand.
Bracket creep also increases the business cost of labour, not just from wage demands but also from payroll and compliance. It might push informal sector labour (or firms) to try to stay under thresholds or avoid formalization.
Most of these effects affect the cost of doing business for Small, Medium and Micro-enterprises (SMMEs), employing low-earning and middle-earning workers.
Government revenue growth, but with potential unfairness
The government benefits from “bonus” revenue due to bracket creep in inflationary times, collecting more taxes without nominal rate hikes. But this might come at the cost of fairness or political backlash.
Recommendations
To reduce bracket creep, the government should regularly adjust the tax thresholds, indexing tax brackets, thresholds and exemptions to inflation. The tax system should respond to the changes in the cost of living.
The government should conduct frequent tax reviews, consulting ordinary people and businesses on how the tax burden and real incomes are changing.