A RECENT government decision to reduce Pay as You Earn (PAYE) is expected to provide income tax relief to employees by increasing their disposable incomes that will in turn increase their purchasing power.
This is good news because consumer spending will not only cause the economy to grow, but also sustained consumer spending will make it less likely that the country will slip into a short-run economic downturn.
Increased consumer spending will stimulate demand for goods and services thus boosting the growth of the country’s manufacturing and service industries.
Disposable income is what economists use to monitor how much households are spending and saving. It is the amount of net income a household or individual has to invest, save or spend after income tax.
Disposable income data helps economists to analyse and make predictions about the ability of consumers to make purchases, pay for living expenses and save for the future.
For example, family income matters, with wealthy families increasing their spending on insurance and pensions, as well as food and housing. Poor families spent a larger share on food at home and transport services.
Minister for Finance and Planning, Dr Philip Mpango, while tabling the 2020/21 budget in Dodoma said the government had adjusted income tax brackets and the minimum threshold for employment from 170,000/- to 270,000/- per month.
That means employees receiving 270,000/- were charged 6,570/-, but from now they will be exempted from taxation. Those with salaries above 270,000/- to 1m/- will save up to 51,600/-.
In the past five years, Tanzania lowered income tax brackets in the 2015/16 budget from 12 per cent to 11 per cent. Then, in the 2016/17, the government reduced the income tax from salaries from 11 per cent to 9 per cent.
Some analysts say the government’s move to reduce income tax is intended to bridge the gap and negative impact caused by the coronavirus pandemic in the country.
But others look at it as an important decision that will stimulate economic growth because more goods will be demanded, thus calling for increased production meet demand.
Reducing income tax to workers is one of the ways of lifting the economy and boost small trade because people will spend more on buying goods.
Therefore, the government’s decision to reduce income tax from salaries is commendable and will not only spur economic growth, but also be instrumental in the fight against poverty in the country.