Revenue mobilization is the venue through which governments of nation raise fund to address the social-economic needs of their citizenry. Ghana is not left out, as one of the preconditions by the International Monetary Fund (IMF) before advancing any loan facility to Ghana was for the Government of Ghana to work its revenue mobilization drive.
In view of this, the government of Ghana has fully implemented the taxing of betting (lottery winnings). One may ask, is this tax a justified one? In this article, we discuss whether there are justifications for introducing such taxes and the approaches which could be adopted for the rethinking of the policy.
Taxes imposed on actions considered undesirable by the broader society is nothing new in the Ghanaian tax landscape as it has already been done in the case of alcohol and cigarette. There are many policy rationales for introducing taxes to contain undesirable behaviors, however, there are two basic justifications given for doing so by economic theories. Pigou’s idea of externalities (costs that are not considered in a market transaction) is the foundation for introducing such taxes. Pigouvian taxes, like carbon taxes that put a price on carbon emissions, seeks to contain the effect of such emissions that are not internalised in the organisations costing. Externalities like greenhouse gas emissions are expensive for society because the market does not internalise them and hence the need to tax them.
Targeting internalities is a second, more debatable justification for taxing undesirable activities. These costs are suffered by individuals because of their own undesired behavior which they are unable to change as per the principles of behavioral economics. This may be considered a paternalistic approach with the intention to stop people from making irrational decisions. Taxes on alcohol are one example; even though people might not wish to drink more than a particular amount, they occasionally do, which sometimes has impact on the health sector of the economy, thus, the basis for such a tax.
Differentiating between these two justifications is not always simple. For instance, internalities (to try to safeguard consumers from binge drinking) or externalities (the need to price the additional costs that heavy drinkers place on society) could be used to justify alcohol taxes.
The government of Ghana’s aim for taxing betting may not be far from the justifications mentioned above. Taxing sports betting can be justified by the additional cost that bettors put on the health system (mental health issues and substance abuse), or as an incentive for people to contribute to the reduction of the spread of betting among the youth as this has some impact on the educational system. Also, the betting tax can be justified by the need to protect its negative impact on an immediate family who may have to look for money to pay for debts that may arise because of a relative engaging in betting activities. The latter is particularly contentious, though, as some are strongly of the view that people engage in betting because of a high rate of unemployment and can view certain betting policies as an attack on their only source of income to support their families.
A concern is that betting might, in exceptional cases be the only source of revenue for some individuals amid the high unemployment rate in Ghana, hence putting a tax of 10% on the winnings may erode the earnings that will be at their disposal to support their families.
While certain individuals believe that taxing winnings from betting lacks strong justification, their stance changes when it comes to using taxation to curb other undesirable behaviors. This suggest that in taxing undesired behaviors, there should be a certain threshold of harm above which such taxes are justifiable. It seems reasonable to believe that the harms arising from betting in the Ghanaian society has reached such threshold and hence the need to introduce such policy to contain it.
Despite the perspective of the two economic theoretical justification, being asked to pay tax on income earned from engaging in betting (which in most cases is seen as an investment) may be seen differently from being asked to pay tax on the purchase of cigarettes which is been used to curb an undesirable behavior. This has led to another school of taught, which seeks to justify that, taxation of lottery winnings falls within the remit of taxing an investment income. They argue that taxation of betting winnings as income from investment is to ensure that it is been drawn parallel to other forms of investment income such as interest, dividend and capital gains which puts the country’s path of ensuring consistent treatment, reinforcing fairness and equity in the tax system.
How should the tax be designed?
Based on our discussion above and the inherent challenges entangling the implementation of the policy, this article has outlined some proposal that could help address the issue for consideration by the policy implementors.
- Threshold for taxation
We support a betting tax system where a threshold could be set above which the betting tax is applicable, as is the case with withholding taxes on general goods and services. Thus, setting a threshold of say GHS 5,000.00 winning above which the tax could be charged would help ensure that the policy targets larger winnings and not overly burdening small-scale bettors.
- Progressive tax rates
We are of the view that the implementation of a progressive tax rate system based on the amount of winning could ensure that higher winnings would be subject to higher tax rates while those with lower winnings would subject to lower rates. For instance, those with winnings between GHS 5,000 to GHS 10,000 could be subject to a withholding tax of 3% while those with winnings between GHS 10,000 to GHS 15,000 could be subject to a withholding of 5% and so on. This approach will ensure that individuals with substantial winnings contribute proportionately more to government revenue.
- Cross-border and online betting
This approach is to address tax implementations on cross-border and online betting activities. The authority should develop a mechanism to track and tax winnings generated through international betting platforms and then subsequently address the taxation of Ghanaians betting in other jurisdictions.
Setting a comprehensive regulatory approach
This approach is to address the externalities and internalities regarding the sector by ensuring that the betting sector is now highly regulated. This could be done by setting an age limit for individuals who can engage in betting, ensuring that operators set in age verification systems, access control, and considering other factors such as responsible gambling education, prevention of excessive betting, advertising, and marketing restriction and cross-sector collaboration, among others. By integrating these strategies, the framework effectively manages negative externalities and addresses internal concerns, promotes responsible behavior as well as safeguards individuals and society from the potential harms of gambling.
Conclusion
Amidst economic challenges, the surge of betting in Ghana reveals an intricate interplay of externalities, and internalities necessitating thoughtful policy measures. Ghana stands at a crossroads, aiming to harmonize autonomy and the greater good. By leveraging its regulatory authority, Ghana can establish a protective framework, ensuring the welfare of its citizens while nurturing financial literacy and ethical gambling behaviors. One crucial aspect is the effective taxation of bet winnings, which contributes to both revenue generation and responsible gambling practices. Through these deliberate actions, the nation can effectively address the complexities associated with taxation of bet winnings as well as fostering a stronger and well-informed society.
Authors
Prince is a Tax Consultant, Public Sector Economist and Policy Analyst. He is also a member of the Institute of Chartered Accountants Ghana, Chartered Institute of Taxation Ghana and also a Certified Financial Modeling and Valuation Analyst by the Corporate Finance Institute.
Emmanuel is a Tax Consultant, Business Strategist and Policy Analyst. He is Certified Financial Modeling and Valuation Analyst, a Certified Environment, Social, Governance (ESG) specialist, both by the Corporate Finance
