Wednesday, 1 April 2015

Burundian government disapproval of telephony suppliers

The Burundi government disapproves of a price increase by telephone suppliers following a tax change, according to its spokesperson and reported on its website

The government says that it has changed the taxation of telephone use from value added tax and consumption tax to a flat rate tax of 42 Burundian Francs per minute of telephone use.  Before, if a company charged FBu200 per minute and there was a 40 percent value added / consumption tax (the combined rate isn't stated), then the tax would be FBu80.  If another company charged FBu100 per minute, the tax would be FBu40.  Afterwards, the tax would be FBu42 per minute for both companies.  The new tax tax looks easier to administer, as only the total amount of telephone calls have to be tracked.

Could the government have anticipated the price change, and are they right to disapprove?  A value added and consumption tax increases the sales price of a good by a proportion of the price, while the new per unit tax increases the price by a fixed amount.  The graphs show the impact of the tax change.  The demand curve is marked by D, and it doesn't change.  The supply curve without any tax is S.  With the proportionate tax, the supply curve slopes upward more steeply.  With a per unit tax, the supply curve is shifted up by a fixed amount.

Graph 1: Per unit tax reduces prices

Graph 2: Per unit tax increases prices

The market price and quantity are found at equilibrium where supply and demand are equal.  In the first graph, introducing the per unit tax results in a decline in the price, while in the second graph introducing the per unit tax results in an increase in the price.  Whether the price goes up or down depends on the shape of supply and demand without the taxes, and the size of the taxes.  We can certainly say 1) prices will generally change after the tax, and 2) that if the proportional tax is very small (large), prices will go down (up).

We might assume that the change is revenue neutral - so the government collects the same amount of tax after the change as before - and see what happens to the price.  But I can't immediately think what the impact on prices would be, because there are possibly different equilibriums that would give the same revenue, depending on the shape of supply and demand.

A highly trained or experienced regulatory economist should be able to perform the algebraic and statistical analysis to sort out the optimal taxation policy, and whether the companies are taking advantage of the change to extract more profits from consumers.

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