The National Health Insurance Bill, 2017 that parliament is about to pass into law in order to establish the National Health Insurance Scheme (NHIS) will impose an earmarked tax to finance the scheme. According to the Bill, the tax shall be paid by citizens or established resident of Zambia aged from 18 to 70 years.
Mentally or physically disabled persons who may not be able to work or persons that are classified as indigent (poor, or needy) by the Ministry of responsible for Social Welfare may be exempt from the tax.
The National Health Insurance Management Authority (NHIMA), which the bill proposes to establish for the management of the scheme will develop a comprehensive “benefit package” of health services that all citizens or established residents of Zambia will access. The benefits package will be provided by health care services providers, that will be accredited by the NHIMA.
Evaluation of the Tax
In order to make a judgement of the appropriateness of the tax we need to evaluate it against the generally accepted characteristics of a good tax, namely Revenue Adequacy, Equity, Economic Efficiency, Administrative Efficiency and Flexibility.
The amount of revenue that can be collected in an economy from any tax is a function of the tax rate, the tax base and the administrative effectiveness, thus:To adequately finance the NHIS the government has to work out the operational budget for the NHIMA and the budget for the payments to health care provider for delivery of health services to members. When the budgets are made, the government now has to determine the rate that can yield sufficient revenue from a given tax base. In this case the tax base is, all income earning Zambian citizens from 18 to 70 years old. Once the budget and the tax rate have been determined, an effective administration mechanism that will enable the realization of the expected revenue yield has to be put in place. If the administration is 100% effective, 100% of the expected revenue would be achieved. If the administration is ineffective, the expected revenue may not be realised. The policy maker may seek to compensate the administration’s ineffectiveness by increasing the tax rate. However, disproportionate increases of the tax rate do not guarantee realization of the target revenue as they tend to increase the rate of default, evasion or avoidance. They also tend to increase the cost of administration to unmanageable levels.
We do not have actuarial scientists in our team, and neither do we have health economists. In this regard, we are laymen. However, this will not stop us from pondering on the numbers that may be driving this reform because the reform will definitely take away a good or more from our “consumption basket”. We, therefore, need the policy makers to help us with the numbers that are motivating this policy. Our starting point is this analysis.
According to the 2010 Census of Population and Housing Report, Zambia’s labour force was 4.3 million, of which only 55.2% were working, either in formal, informal or self employment. This leaves us with a tax base of 2.4 million. Though this figure included persons from 12 to 17 years old that time, we can safely take the figure as the approximate tax base for the NHIS tax. This is because 7 years have elapsed from the time the census was conducted, and those that were counted as being 12 years old in the labor force are by now 19 years old and are eligible for registration as contributing members of the NHIS. Apparently, this is about the same tax base that is prescribed for Income/Turnover Tax. The Zambia Revenue Authority (ZRA), the organization mandated to collect the Income/Turnover Tax has been in existence for the past 25 years, with presence in all border towns, provincial capitals and some major towns. It has only covered less than 300,000 taxpayers (including those paying employment tax (PAYE) that do not appear on the taxpayer register). This is less than 13% of the tax base.
Zambia’s population is estimated to be around 17 million in 2018. Assuming 60% of the population will visit a health care facility at least once each year and access health care costing, on average K500, 10.2 million people would incur a bill of K5.1 trillion every year for the NHIMA to settle to health care providers. This amount does not include the NHIMA‘s own operational budget. If we make a very optimistic assumption that NHIMA will outperform ZRA in effectiveness and cover 100% of the tax base, which is largely composed of income earners in the informal sector, an opportunity that ZRA would not hesitate to seize, eligible citizens for the NHIS would have to pay K2,125 per year. Any government hoping to win a general election in the next two years would have to think twice about going this direction. Currently, marketeers, who are in the formal sector (who are under regulation of council market authorities) are required to pay Base Tax of only K150 per year. This is the lowest tax that is administered by ZRA and ZRA has failed to collect it. This is apparently because enforcement of the tax does not auger well in the current political dispensation.
If we assume that the ZRA coverage of the tax base is the most economically practical, on average, citizens would have to pay about K17,000 per year to meet the K5.1 trillion requirement to finance the health scheme. Of course, this figure is insane. The majority would never have to utilize this much on health care in one year, and it would be unthinkable to ask citizens to pay that much, even if they could comfortably afford to pay it.
If, on the other hand, we assume that K2,125 per year is a fair amount, and is practically collectable. The scheme would only raise K637.5 million, thus, 14.3%. The health scheme would be unsustainable as 85.7% of the required revenue would have to come from parliamentary appropriations, loans or donor aid- the situation that the government is trying to come out of.
In the absence of the policy makers’ explanation of the health economics or the actuarial science that is motivating the reform, we shall conclude that this tax may not raise the required revenue and the success of scheme is threatened.
To achieve equity, taxes are administered on ability-to-pay principles. This means that peaple with higher incomes in society must contribute more to the welfare of society-verticle equity, while those with equal income must contribute the same-horizontal equity). This is achieved by designing taxes that are progressive. A good example of a tax where this principle is visibly implemented is the Pay As You Earn (PAYE) taxation regime. The provision of exemptions for the none income earning groups in the NHIS Bill gives the tax some progressivity. There is however, no indication of progressivity within the eligible population for the NHIS tax. It is clear for pension earner and the self employed that they will carry the burden of the tax is on them. To properly establish who is paying how much of the tax amongst the employment income earners, one needs to conduct a tax incidence analysis.
Where as the legal incidence (whose is required to pay and account for the tax) of the NHIS tax falls on both the employer and the employee in prescribed proportions, the economic incidence (who suffers the economic burden) may not necessarily follow the same proportions that are prescribed by the Bill. Depending on the elasticity of labor, the economic burden may fall either entirely on the employer or entirely on the employee, in extreme cases. For example, if labor is extremely elastic, the employer may gross up the emplyees emoluments with tax in order to retain labor. If it is extremely inelastic, the employer may shift the entire burden on the employee to avoid the cost of the tax by denying the employee other benefits. Such an anlysis would help us determine who is paying how much of the tax and establish the progressivity or regressivity of the tax. However, regardless of whether we do that or not, it is clear from the 2010 census figures that, in the best-case scenario, only 14.1% (2.4 million) of the citizens that will benefit from the scheme (17 million), will carry the tax burden. We can, therefore conclude from this indication that the tax would be unfair and thus not easy to enforce.
Given that the target population for the tax is all income earning persons in society and all employers, it is by design a very economically efficient tax as it does not leave much room for adjustment in consumer and producer or employer and emplyee choices. The tax, therefore, can score highly on the Economic Efficiency test.
The last test in our evaluation of the tax is the Flexibility test. In this test we would like to establish if the proposed tax is flexible enough to withstand economic cycles, such as recession or inflation.
Ad valorem taxes (taxes that are calculated as a percentage of a given value) are more flexible in times of high inflation than specific taxes because they automatically increase with prices. Specific taxes on the other hand lose value and can upset budgets if not adjusted because the purchasing power of money is reduced by inflation. Specific taxes can, be adjusted in response to inflation by passing legislation.
The proposed NHIS tax appears to be a specific tax. If so, it will continuously lose value with inflation. However, the fact that the value of the tax will not be embed in the principle tax gives it a bit of flexibility. How flexible it will be depend on the level at which adjustment of the tax will be allowed. It can either be at ministerial level, in which case it may be adjusted by statutory instrument signed by the minister, or at NHIMA level, which may be adjustable by Gazette Notice issued by the Director General of the NHIMA. The lower the level at which the adjustment will be allowed, the more flexible the tax can be as the process of adjustment is shorter at lower levels. The disadvantage of tax rate adjustments is tha they are visible and they do not auger well politically.
Our conclusion in our evaluation of the proposed new tax is that it may not be adequate to finace the scheme because the tax base (2.4 million) is too narrow to generate the required revenue required to finance a health insurance scheme that must be accessed by 17 million people. Secondly because only 14.1% of the intended beneficiaries of the tax may carry the burden of the tax, it is not a fair tax and will be prone to evasion or avoidance schemes, thus, dificulty or costly to enforce.