JOHANNESBURG – South Africans pay a lot of tax and get very little for it.
Or do they?
Judge Dennis Davis, the chair of the Davis Tax Committee that was tasked with a comprehensive review of South Africa’s tax system and Mike Schüssler, chief economist at economists.co.za got into a heated debate on Thursday when the value taxpayers get for their money was discussed at the National Budget breakfast of The Financial Planning Institute of Southern Africa (FPI) and the South African Institute of Tax Professionals (Sait).
Schüssler said South Africans pay a lot of tax and get “very, very little for it”.
He said for the last 63-odd years, South Africa’s average economic growth rate has been around 3.4%, but it has deteriorated significantly since the recession and has recently been closer to 2%.
“We are a laggard in world terms. Today South Africans are poorer per capita than the average citizen of the world. That was not the case until recently,” he said.
Schüssler said if social security contributions (which the country has very little of) were left out, South Africa had one of the highest tax to gross domestic product (GDP) ratios in the world (on a five-year average).
“For this high tax rate – what do you get? Well, you pay for your own security. You probably pay for your own medical aid, you have to pay your own social security and pensions and you still have potholes in the streets and electricity that does not work.”
Schüssler argued that this was no longer a redistributive system, but a punitive system.
“It’s becoming a problem because firms are no longer that interested in staying here.”
But Davis disagreed.
When South Africa as a whole is considered, and not only middle and upper income groups, it is “profound rubbish” that taxpayers don’t get anything for their tax money, he said.
The World Bank has suggested that South Africa’s tax transfer system is the best in the world, Davis said.
It has brought down the Gini coefficient from around 0.75 to 0.59, he said.
The Gini coefficient is an indication of income inequality where 1 is the most unequal.
“In effect the tax and transfer system has created quite a lot of stability which otherwise wouldn’t be there. Of course it doesn’t go to you [middle and upper income South Africans] but that’s the legacy of apartheid I’m sorry to tell you.”
If the tax and transfer system was to be fiddled with and it failed as a result, political instability could become unbearable, Davis warned.
Davis fears political instability. “…given the instability in Sars, and given the fact that we have an economy in serious trouble – if the tax and transfer system fails then political instability in this country will engulf us in such a way that quite frankly everything else is going to be academic.
“So please don’t come and tell me right in some rhetorical flourish that in fact you don’t get any value. The society gets enormous value.”
Davis also argued that it was incorrect to compare tax to GDP ratios and exclude social security as it is a hugely complex form of taxation that is deeply intertwined with income tax in many other countries.
But Schüssler said for the productive side of the economy to do more than just redistribute the existing part of the “cake”, things had to be approached differently.
The productive side of the economy had to be kick-started in order to create jobs and lure investment.
“It is the difference between growing the cake and dividing the cake and I’m for growing the cake,” Schüssler said.
He said the number of rich South Africans was limited and their increased tax burden was going to be a problematic.
“Money is very silent when it leaves [the country],” he said.
Both parties however agreed that the economy was in trouble, that more jobs had to be created and that the budget deficit had to be addressed.
Davis said it is important that solutions be found.
He agreed with Schüssler that South Africa had excessive consumption expenditure in the public sector.
Davis said it was important to be practical and fair about where the real problems were and to get solutions.