Pay Fair, Grow Fast – Why progressive taxation builds prosperity in market capitalism

Market capitalism only functions when the rules are just, and fundamental services are properly funded.

Progressive taxation serves as the foundation of the market economy. It means those who earn more and own more, due to the state having relinquished the means of production to them, must contribute proportionally more so that everyone, including them, can access public goods and services to lower living costs for everyone and increase opportunities for all, including them.

Africa is lagging in prosperity because its foundation of tax collection is fragile and misunderstood. Issues like tax evasion and limited tax capacity have kept African governments reliant on costly borrowing, and the burden is borne daily by citizens and businesses alike.

Africa’s Cost of Capital Crisis

Borrowing costs in Africa are up to 500 percent higher than World Bank rates, and up to 12 times higher than in Germany. Countries and firms pay inflated prices for capital.

Constrained Tax Capacity

Africa is only able to gather about 15 percent of GDP in taxes compared to roughly 40 percent in Europe and North America. With such low tax-to-GDP rates, African countries cannot adequately fund services without resorting to debt.

Crippling Debt Servicing

In some nations, debt repayments exceed 50% of tax revenues. Funds meant for schools, clinics, and power are diverted to pay interest on borrowings.

Crowding Out Private Sector

Governments heavily borrow from domestic markets and, ironically, from tax evaders who use their unpaid taxes to invest in government debt instruments (such as treasury bills and bonds). Local businesses and emerging entrepreneurs face higher, scarcer capital as a consequence.

Why this occurs
1. Underdeveloped Progressive Tax Systems* After governments ceded direct control of the means of production to individuals and private businesses, many ailed to establish systems for collecting personal income and property taxes from high-net-worth individuals. Without these tools, states cannot tap into wealth at the top.

2. Overdependence on Indirect Taxes

Most governments then rely heavily on VAT and other consumption taxes. While these are easy to collect, they hit ordinary households hardest. They do not effectively reduce inequality nor generate enough revenue for substantial infrastructure projects.

3. Tax Evasion Deepens the Divide

When elites and corporations evade or underpay progressive taxes, the burden shifts downward. Compliance remains low, trust diminishes, and the state must borrow more, often at higher costs, further straining budgets.

The escalating cycle

High borrowing costs are creating a vicious cycle: revenue is diverted to interest payments rather than investing in roads, power, or digital infrastructure. Without these public goods, living and doing business remain costly. Ironically, those evading taxes often utilise the money they avoid paying to live above inflation, widening the prosperity gap. This results in low incomes for ordinary citizens, a narrowing tax base, and increased government borrowing.

Private companies face double difficulty. First, they pay higher interest due to elevated sovereign risk. Second, as governments crowd domestic markets for loans, less capital is available for entrepreneurs.

The way forward

1. Enhance Progressive Tax Capacity*: Africa must develop efficient collection of personal income, capital gains, and property taxes. Use data, audits, and transparent registers to combat evasion.

2. Safeguard the Middle and Poor: Maintain straightforward VAT systems, but shift tax burdens toward wealthier individuals.

3. Encourage Compliance: Make tax payments visible. Tie them to improved services, credit histories, and quicker business registration.

4. Reduce the Risk Premium’ Credible tax policies lower sovereign risk, leading to cheaper capital for governments and businesses.

The core message

Prosperity in market capitalism is no accident; it is funded by each citizen contributing a fair percentage of their gains for the common good. When society collects fair, progressive taxes and allocates them to public goods, capital becomes cheaper, businesses grow, and households retain more of their income.

Africa cannot bridge the gap solely by borrowing. It must do so by taxing fairly, collecting comprehensively, and investing in infrastructure that ensures markets serve everyone.