Still stumping for the thesis that Zimbabwe’s stock market is undervalued, John Legat, CEO of Imara Asset Management, “noted that in the third quarter of 2010 foreign buying jumped to 63 percent of all activity on the stock market compared to 29 percent the previous period, a sign of attitudes changing among those running frontier Africa investment funds.” 

Legat made headlines earlier this month when he announced his support for a flat tax regime in lieu of the current proposed revisions (supported by KPMG tax director, Steve Matoushaya) which would incorporate a residence-based system meant to tax all Zimbabweans for income earned outside the country, as well as that earned locally.  “The net result of low tax rates, if successful, will be immigration and a rising population which will immediately add to consumer demand, investment in new businesses and a boost for the construction industry as housing investment rises.  That in itself will lead to a growing tax base,” argued Legat.  “In Russia, the tax system was too complicated and tax rates were high.  In 2001 President Vladimir Putin introduced a flat tax of 13 percent, that rate being applicable to all personal income.  He reduced corporation tax from 35 percent to 24 percent.  In just three years, his tax reforms had resulted in a significant increase in government revenues and a reduction in the informal economy.”

In sum, Legat concluded, a flat tax would not only encourage a return migration, but it would incentivize the current informal sector.  The net result, he opines, is less bureaucracy and higher after-tax incomes–which in turn would further fuel P/E ratios and larger receipts.

“For a country like Zimbabwe, which is starting with a clean [post hyperinflation] slate, rising global taxation provides a great opportunity to attract skills back to the country. In very simple terms, if Zimbabweans living in South Africa are paying 40 percent in income tax at the top band, 15 percent provides an attractive incentive to relocate back to Zimbabwe.  Furthermore the informal sector will slowly be encouraged to join the formal sector, especially where good policing can discourage underhand/illegal dealings . . . a lower tax rate [will] also result in higher after-tax income and hence higher disposable incomes, encouraging greater consumption that would translate into higher value added tax receipts.”