According to the International Monetary Fund (IMF), many African economies are facing shrinking budget flexibility due to rising debt-service costs. Countries such as Ghana, Kenya, and Nigeria have responded by adopting measures including electronic transaction levies, digital service taxes, and higher import-related taxes. While raising public revenue is necessary, relying heavily on taxation can discourage entrepreneurship, reduce private sector investment, and increase the cost of doing business. Small businesses and young entrepreneurs are often affected the most because higher taxes reduce already limited profit margins and increase operating costs. Rather than relying primarily on higher taxes, African governments should formalize more businesses, reduce regulatory barriers, and promote private-sector growth as a more sustainable path to prosperity.
Increasing taxes may generate additional revenue in the short term, but it creates structural barriers that limit economic growth. Higher tax burdens, combined with complex regulations, discourage investment and make it harder for businesses to expand. Small and medium-sized enterprises (SMEs), which account for a large share of employment across Africa, are particularly affected because they often operate with limited financial resources. When businesses delay expansion or remain informal, fewer jobs are created, and governments collect less tax revenue over time. A sustainable fiscal strategy should therefore prioritize economic growth alongside revenue generation through a broader tax base.
A broader tax base begins with bringing more businesses into the formal economy. In Africa, many businesses remain informal because registering a business is expensive, time-consuming, or overly complicated. As a result, governments lose potential tax revenue while business owners miss opportunities to access finance, legal protection, and larger markets. Governments can address this by simplifying registration procedures, reducing registration fees, and digitizing registration services through integrated online platforms. Local governments and business registration agencies should also conduct public awareness campaigns to help entrepreneurs understand the benefits of formalization. Rwanda’s business registration reforms demonstrate how simpler procedures can encourage business formalization and improve revenue collection. Expanding the number of registered businesses creates a larger and more sustainable tax base without increasing tax rates.
Governments can generate more sustainable public revenue by making it easier for businesses to start, grow, and operate. When regulatory barriers are reduced, more businesses expand, create jobs, and pay taxes, broadening the tax base without increasing tax rates. Businesses also face costs created by burdensome regulations. Lengthy licensing procedures, permit delays, and unnecessary administrative requirements increase the cost of starting and operating a business. These barriers discourage entrepreneurship, reduce investment, and encourage firms to remain informal. Regulatory agencies should regularly review licensing requirements, permit procedures, and registration rules to eliminate unnecessary barriers. Digitizing public services through online licensing systems and one-stop business portals can further reduce compliance costs and processing times. Business associations and chambers of commerce should also work with policymakers to identify regulations that unnecessarily increase business costs. As more businesses grow and enter the formal economy, governments collect more tax revenue through increased economic activity rather than higher tax rates.
Long-term economic growth depends on expanding private enterprise rather than increasing the tax burden on existing businesses. A growing private sector creates jobs, raises incomes, attracts investment, and naturally broadens the tax base. Governments should create a stable business environment by protecting property rights, maintaining predictable economic policies, and investing in infrastructure through public-private partnerships. Financial institutions can expand access to affordable credit for SMEs, while business associations provide mentorship, networking opportunities, and market information that help entrepreneurs grow. As businesses become more productive and competitive, governments benefit from higher, more sustainable tax revenue generated by economic growth rather than repeated tax increases.
Africa’s prosperity will not be secured by repeatedly increasing taxes on existing businesses. It will come from creating an environment that enables more businesses to start, formalize, invest, and grow. Broadening the tax base, reducing unnecessary regulations, and strengthening the private sector would generate sustainable government revenue while encouraging entrepreneurship, innovation, and job creation. Together, these reforms would expand economic freedom, strengthen public finances, and create greater opportunities for Africans to build wealth and improve their livelihoods. Sustainable prosperity is achieved when governments enable enterprise to flourish rather than placing heavier burdens on those already driving economic activity.
Sham-Una Delwinde Yussif is an African Liberty Fellow.
The Chanzo is a co-publsiher of this article.
Image by Markus Spiske via Unsplash.