The Taxing Taxation of Microfinance

By Alexis Ohanian, KF10 Armenia. He co-founded reddit, started a company called breadpig, and loves lavash.

A business reporter I’ve befriended here in Yerevan once told me, “There’s one thing you can guarantee any businessman in Armenia will say in an interview — just ask him if his company is profitable. He’ll always say no.”

Only profitable companies pay taxes. There’s no reason to boast about being profitable – especially when it comes time to (theoretically) pay taxes. There are some very successful businessmen in Armenia, with companies that continue to grow year after year, yet don’t ever seem to turn profits.

Not only is this a significant revenue for the Armenian government, it means microfinance institutions shoulder an extra tax burden simply because of the nature of their business.

Less money, more problems

All but the most ardent libertarian would see an obvious need for taxation (I, for one, enjoy knowing my tax dollars pave roads and put out fires). In a country like Armenia, more money in the coffers of a responsible government could mean creating more opportunities for its population, which currently employs only ~51% of its able-bodied population. But human nature is to take the path of least resistance, so microfinance institutions are easy prey for a revenue hungry government.

Because the banking system gets its Armenian Dram from the Central Bank, it has to comply with a rigorous set of procedures and reporting. That means they’re one of the few industries that must provide a rather radical level of transparency to the government. When it comes time to collect more tax money, the state can either institute an futile corporate tax increase or target the low-hanging fruit (not apricots, the banking industry, since they know they can get away with it).

Or government could enforce a just system of taxation.

Give Armenian CEOs the chance to brag about their profits (and be fairly taxed for them)

Granted, 2008 saw strong arguments for better oversight of the banking industry. But in countries like Armenia where a nascent microfinance industry is striving to put capital in the hands of entrepreneurial Armenians, the effect stifles an entire nation. Meanwhile, the “profitless” businessmen who skirt taxation may be making short-term personal gains, but in the long-term, are crippling Armenia’s economy. And it’s not just about microfinance.

It’s in a democratic government’s long-term best interests to encourage a thriving economy with a reasonable taxation system: the more financially successful Armenians it can create, the more tax revenue. Simply preserving the existing wealth of the few who control it will do nothing for encouraging any entrepreneurship. This is bigger than making it more costly for a beekeeper to get a $1,825 loan because his MFI is subjected to extra taxes and compliance requirements. It developing an anti-entrepreneurial culture.

21st Century Armenia

Income inequality isn’t the problem (though it’s a societal problem, the US has long endured it while also creating a culture of innovation). If ‘success’ means knowing the right people, aspiring business owners will find it elsewhere. Just another reason to go take their work-ethic and intelligence to another country — one that will enjoy their innovation, job-creation, and yes, tax dollars, for decades to come.

Speaking of which, there’s a giant “Help Wanted” hanging on the Statue of Liberty these days. It powered the America’s 20th century — although it gathered dust during the last Bush presidency — and it’s back to give the USA a chance to stay competitive in the 21st.

Contrast that with Armenia’s 20th century, which had genocide followed by Communism deport, stifle, and kill Armenia’s best and brightest. Don’t let Armenia itself be responsible for holding Armenia back in the 21st century.