Government revenue is mostly from taxes. A Laffer curve shows how tax revenue and tax rate are related.
The Laffer curve is named after Professor Art Laffer who suggested that if the tax rate is 0%, then government revenue would be zero. If the tax rate is 100%, again there would not be any
government revenue as individuals and firms would not be willing to contribute 100% of their income to the government. No one would be willing to work.
The Laffer curve also shows the rate at which the government can achieve a maximum revenue Tr, the tax rate should be Tx. In addition, it also shows that the government can achieve very high tax revenue at two rates, 25% and 75%.
Given the fact that a high tax rate discourages hard work and enterprise, the best option is a tax rate of 25%. According to the advocates of supply side policies, lowering tax rates increases production and supply. This in turn increases the national income.
Tx represents the optimum tax rate where the maximum amount of tax revenue can be collected. 4.0 PRIVATISATION VS NATIONALISATION
Privatisation implies
- The transfer of the nationalized industries to private ownership. - Selling state assets, either completely or partially
- Opening up state monopolies to outside competition
- ‘Contracting out’ to the private sector services paid for out of public funds, such as, refuse collection, which was previously done by the local government.
- Charging beneficiaries ‘Economic fees’ for publicly provided goods and services like hospitals and schools.
Therefore, privatization implies more than the movement of assets from the public to the private sector. It embraces all the different means by which the disciplines of the free market in the provision of goods and services can be applied to the public sector.
The case for privatisation is the argument that is put forward for deregulation of industries, which is, the removal or weakening of any form of state interference with the operation of free market activity
The main aim of deregulation/privatisation is to improve competition and efficiency.
Once the statutory barriers are removed, the economy is said to have liberalized industries or it is following a liberalized market economic system, compared to the command economic system. 4.1 Arguments for privatisation
a) Reduced burden on the public purse as the government no longer supports loss- making nationalized companies. Privatisation allows a reduction in the public sector borrowing requirement and tax cutting, as it provides funds for the treasury when companies are sold. b) There is greater economic freedom from detailed economic control as privatized companies
c) Improved efficiency through competition in the market, this encourages producers to cut their costs in order to be more competitive, and firms have to be innovative in the search for
profits.
d) In addition to the above, there is also improved quality since firms have to compete to survive and have to be responsive to customer complaints.
e) If companies are not in state control, there is greater resistance to the power of trade unions, industries are more fragmented and difficult to organise.
f) Privatisation leads to a creation of a property-owning class, more people are able to buy shares, this gives buyers market power, they work harder and strike less, a better
understanding of private profit motive and business problems.
g) Costs and inefficiency decrease as bureaucracy from nationalized companies is reduced. 4.2 Arguments against privatisation
a) Privatisation does not mean that competition is automatically enhanced. Instead, private monopolies have been created. An example is if the Zambia Electricity Corporation (ZESCO), became privatized, it means a previously government controlled monopoly becomes an uncontrolled one in private hands, with no public responsibility. Consumers may suffer. However, this is what leads to most governments to regulate or attempt to regulate the newly privatized companies in much the same way as the nationalized industries.
b) Just as privatization does not mean competition, it also does not guarantee efficiency. Customers have ended up with fewer services, and at higher prices. A good example is rural transport. The government owned United Bus Company of Zambia (UBZ), used to go to all the rural areas, everything was timetabled (date and time).
c) The quality of service has reduced, with costs being saved by reducing the number of workers ‘right sizing’, paying lower wages and reducing the services that were being provided, as mentioned above, some routes were termed ‘unprofitable’ or the roads ‘impassable’.
d) Privatisation may allow people in rural areas without Economic power to suffer, since loss- making services are not provided by the private sector, most of which are important to the poorest members of the society.
e) In theory, it is the loss-making companies that are supposed to be privatized, but in practice, the privatization exercise is rarely properly done in most countries in the world, for example asset sales are under priced to attract buyers and in the process, create big capital gains for private investors.
f) Companies that are in private hands often pay their top executives very large salaries and offer them very good conditions of service, while reducing the powers of trade unions and paying
union members low wages. This lowers the morale of the workers and lowers productivity while encouraging pilfering, strikes etc.
g) If competition is enhanced through privatisation, it sometimes leads to waste of resources and the duplication of goods and services, an example is monopolistically competitive market structures.
4.3 Nationalised industries
The public sector includes some businesses run by the government, such as Zambia Electricity Company (ZESCO), Zambia Telecommunications Company (ZAMTEL), Lusaka Water and Sewerage Company etc. Managers of such companies are accountable to the elected politicians (ministers) in charge of that sector, and government-sponsored boards such as the Zambia Energy Regulation Board, which regulates ZESCO, regulate them.
The case for nationalization can be considered alternatively as the disadvantages of liberalisation.
a) Nationalisation can lead to reduced costs through economies of scale, since with increased competition, each firm produces less output on a small scale, and unit costs increase. b) There is provision of un economic services for consumers. Nationalisation, just like the
socialism or planned economic system, social benefits are placed above private profits. It considers the net gain to society, to the point of keeping industries that are clearly
technologically inefficient, as in the case of Maamba coalmines. Another argument in favour of providing uneconomic services is that it helps to protect employment.
c) It is sometimes in the national interest that some basic industries are brought under public control, especially, strategic industries which would be dangerous under private ownership such as atomic or nuclear energy.
d) It may also be necessary to carry out government policy, like controlling the money supply, as in the case of the Bank of Zambia.
e) Nationalised industries have sufficient capital available for investment, because of
government support. Where competition is wasteful, it maybe better to create a large state- owned monopoly, to avoid waste and duplication.
f) A fairer distribution of wealth, the huge profits do not go to the capitalist owners, surpluses are used for the benefit of society. A case in point is ZESCO, the supernormal profits are used for rural electrification. The supernormal profit also justifies the high salaries enjoyed by ZESCO employees.