Response to Government’s Pronouncement of full Implementation of Minimum Wage

On Tuesday, November 19, 2024, the Minister of Finance and Development Planning addressed the nation at a MICAT regular press briefing, in which he provided key highlights of Liberia Draft Budget for Fiscal Year 2025, which has been submitted to the Legislature. Amongst other things, he mentioned government’s commitment to fully implement the Minimum wage threshold as prescribed by the Decent Work Act (DWA) of 2015 by raising the salaries of all government employees making below the threshold to US$150.00, which is the prescribed threshold as provided by the DWA. This is indeed a laudable initiative that all Liberians should be extremely excited about.

I too welcomed this initiative, but with reservation that the Finance Minister’s failure to make inflationary adjustments to the “Liberian Dollar amounts set out in the Revenue Code”, as required under Section 8 of the Liberia Revenue Code may undermine the optimal impact of this policy. As this is not new within the fiscal regime of Liberia, it is important to highlight this as a reminder to the current regime for a call for action. Particularly, this analysis provides the impact this have had on income earners especially in relations to their monthly Income tax deductions.

To start with, the personal income tax table is denoted in Liberian Dollars as follows:

What this means basically is whatever your monthly wage (W) is, your personal income tax is calculated by converting that wage to Liberian Dollars and annualizing same (ie. W x US Rate x 12), and then applying the bracket as highlighted in the Annual Wage Bracket column of the Personal Income Tax Table above.

For a brief history, when this table was legislated in 2011, the framer’s intent was that those employees of government earning an annual salary of US$1,000.00 were exempted from taxes. Because this table was legislated in Liberian Dollars and the US/LD rate was US$70/L$1, the tax-free threshold became LD$70,000.00.

As a result of the lack of government through the Minister of Finance and Development planning to carryout inflationary adjustment to this table, the tax-free bracket now remains LD70,000.00 which falls short of the framer’s intent of the US$1000.00 tax-free threshold due to depreciation of the Liberian currency. Today, LD70,000.00 that was once equivalent to US$1,000.00 is US$386.74 at the Central Bank of Liberia exchange rate of US$181/L$1. This means, people earning as little as US$387 annual income or US$32 monthly income are now paying taxes due to what tax practitioners called bracket creep (ie. falling in a higher bracket due to inflation). To solve this problem, an inflationary adjustment needs to be done like yesterday to ensure that this 70,000ld tax free threshold be raised to 181,000 to reflect the true intent of the policy by exempting those earning annual income of US$1000.00 or monthly income of US$83.33 from taxes. When this adjustment is made, our new tax table will be:

Going back to the Finance Minister’s pronouncement of implementing a salary raise for all civil servants making below the US$150.00 threshold, let’s use this practical analysis to see how the lack of this adjustment undermines the optimal impact on those affected.

John Paul is a government employee making US$100.00 and will be raised to US$150.00 in January. As happy as John Paul is in anticipation of this rise, lets see the real impact on what goes in his pocket.

At US$100.00 John Paul has been negatively impacted already as this:

On the current table John Paul pays annually 50.16USD to the government in Personal Income Taxes. If the table were adjusted, John Paul would pay an annual tax of US$9.99, meaning he is paying US$40.18 more to government in taxes (please see below table for calculation).

When he is raised in January to US$150.00, John Paul will start paying a yearly tax of US$140.17, meaning every month the government will take US$11.68 from his salary, thus giving them a disposable income after Social Security 4 percent contribution of US$132.32. Under the adjusted table, John should actually be taxed annually US$39.99, or US$3.33 monthly, meaning he should have a disposable after social security contribution of US$140.67. This means he pays in excess of US$8.35 monthly and US$100.18 annually (pls find calculation below).

In conclusion, something needs to be done about this situation. The government needs to act now to demonstrate fairness and transparency in our tax system. The rules must be respected.