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Tinkering taxes at own cost

Some OECD member countries have tried to use their tax systems to ease inequalities, but the practice comes with consequences.
The Davis Tax Committee, chaired by Judge Dennis Davis, advises on revenue raising initiatives to suit South Africa's circumstances. Picture: Sait

Tinkering with a tax system to meet social objectives such as the reduction of poverty and inequality is a noble idea – but there is need to tread carefully, especially in a country like South Africa. 

The Davis Tax Committee, appointed by then minister of finance Pravin Gordhan in 2013, has done extensive work on which tax design will suit SA’s unique set of circumstances. Many of its recommendations are in line with international best practice.

The committee submitted 25 reports to the minister and provided advice and guidance on revenue-raising initiatives such as limiting fiscal drag for personal income tax, increasing the top marginal rate for personal income tax, increasing the capital gains tax inclusion rates, and increasing the fuel levy.

Developed countries, and more specifically member countries of the Organisation for Economic Cooperation and Development (OECD), have in the past used their tax systems to ease inequalities – with dire consequences in some instances.

Bert Brys, senior economist at the Centre for Tax Policy and Administration of the OECD, says countries have to introduce complex measures to reduce the heavy tax burden on individuals.

He argues that the effect of trying to use the tax system to reduce inequality is that the redistribution pie becomes smaller because of the tax burden – to the point that many no longer see the sense of participating in the labour market.

Brys likens the personal income tax burden in some countries to “extortion”; there have been cases where 60% of the total tax revenue came from personal income tax and employer contributions to social security.

Brys presented his views during a recent panel discussion organised by National Treasury in Pretoria. He warned South African policymakers against falling into the same trap as OECD countries which introduced social security systems to boost equality. The moves were accompanied by declines in redistribution through the tax system.

Transfers to people in need became less progressive. Citizens had to be incentivised to work rather than getting social assistance in the form of unemployment benefits.

Efforts to get people back into the labour market included the awarding of tax credits if people work a specified number of hours, which they can use to reduce their tax liability.

Cecil Morden, former chief director in the economic and tax analysis unit at Treasury, said the warning signal around social security taxes is one that the country should take to heart.

The introduction of a National Health Insurance and funding it through the payroll system might just be the last straw that breaks the camel’s back, he said.

Keith Engel, CEO of the South African Institute of Tax Professionals and former chief director of the legal tax design unit at Treasury, said the middle class is being squeezed. “Redistribution only affects the upper middle and never hits the top. Meanwhile, various forms of redistribution within and without the tax system already provide support for the poor.”

Personal income tax rates in the OECD were 65.7% in 1981. This was lowered to 43.3% in 2016. The tax-to-GDP ratio in the OECD is on average 34.3%.

In SA, which is battling low growth and high unemployment, the tax-to-GDP ratio is more than 26%. The top marginal personal tax rate is 45%.

The tax burden, carried by a relatively small tax base, is already causing taxpayers to look at ways to “lighten the burden”. Government has acknowledged that non-compliance has increased in recent years.

Thabi Leoka, economist and member of the Vat panel reviewing the effectiveness of the basket of zero-rated items, says in an environment where there is no growth, tax policies seldom help to reduce inequality.

It does the opposite, she says. The risk of credit ratings downgrades at the start of the year and the country’s ability to repay its debt was greater than having the Vat rate increased.

However, she says it becomes very difficult to explain that to 55% of South Africans who are earning less than R100 per month and are experiencing chronic hunger.

The panel has to present its recommendations to finance minister Nhlanhla Nene and the Davis Committee at the end of this month.

Brys says Vat should be seen as a revenue raiser. Any efforts to reverse the decision to raise it will render little results. Prices have increased and businesses will not reduce them when the Vat increase is reversed.

He also warned against increasing the basket of zero-rated items. The country needs the revenue.

African Tax Administration Forum research director Nara Monkam shares the view that poverty and inequality are not “inevitable or accidental”, but the result of deliberate policy choices.

Some of these choices that may reverse inequality include free health and education services (with all the contention around it); decent wages, progressive tax systems and opposition to the special interests of power elites, says Monkam.

There seems to be consensus that the potential distortive effects of inefficient tax policies are far greater under an inefficient government.

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It would help if the government didn’t just steal and waste the money they collect from us.

Our people want everything for free: free houses, free schooling, free tertiary education, free social grants, free water, free electricity and now free private medical care. Who must pay for all of this? In parts
of the Eastern Cape, the average fertility rate (the number of children a woman would bear during her lifetime) is now 4.1. And guess what, those children will now all get free university education! Our population growth and illegal immigrants are two topics which nobody wants to discuss. They should be top priorities.

“Tinkering with a tax system to meet social objectives such as the reduction of poverty and inequality is a noble idea”. Actually not, there Mandy. You are dead wrong.

Socialism in a nutshell” I breathe therefore you owe me”. The communist mantra “from each according to his ability, to each according to his needs”. What this does is create a society of needy incompetent parasites. In the UK these parasites span generations. They call parasitism ” benefits” in the UK. In South Africa the ANC hands out Tee shirts with the slogan “Social security with dignity- my constitutional right” thus buying votes. They are truly a disgrace.

Man is by nature a creator and a producer. One should question the mortality of snuffing out the human wealth creation flame with minimum wages (excluding many from jobs) and tax transfers. If you disincentive people from the labour market, society fails. As we see.

Socialism is really theft. If two people get together and vote to steal from a third it does not make it moral. Certainly nothing noble.

Mandy, please do an article on the actual ‘net’ tax paid by a person earning, say R750, 000. To do this you would have to make some assumptions but if you see the layers of PAYE, divi, VAT, petrol, UIF, airport etc etc then I think we are the 60% rate? These tax paying milch-cows, of which I am one, are sucked dry, we have nothing more to give and (a) we receive basically nothing in return, SAPS er nope, SADF, nope, Post Office errr nope etc etc and we are cross-funding people who are paid to pop out kids and government departments to steal and waste and they do so not with millions (I wish) but billions. This could be your Pulitzer moment, or Order of the Baobab or whatever

Some countries (Read Africa) treat VAT like a total tax because they run bankrupt economies resulting in no investment.

All this prattle is irrelevant in a kleptocracy such as the one we live in.

While the RaceCardists absolutely LOVE reporting everything in racial terms — wealth gaps, boardroom representation, income levels, JSE ownership and so on — they “somehow” NEVER report education or tax paying using the same racial categories. Perhaps “somehow” because it does not suit their agenda.

If whites earn the most, as they repeatedly claimed, then — on the same basis — whites are paying the most taxes! Thus potentially contributing the most towards easing the legacy of apartheid. “Potentially” because taxation assumes that the money is well-spent and not looted. Another racial statistic that the RaceCardres downplay is the *negative* correlation between affluent areas (presumably whose residents pay the most tax) and votes for the ANC. In other words, it is the ANC voters who are colluding in the misappropriation and mis-spending of taxes.

What ANC ignores — thinking it has captured the state and the “commanding heights” with the rest of the economy — is that, in the long term, countries/economies/jurisdictions are competing for investment and skills. If the tax burden (taking into account “white tax” — private/ModelC schools, medical aid, home security, etc) becomes too onerous compared to the benefits (opportunities, lifestyle, standard of living), people will emigrate and “people emigrating” is increasingly including “clever blacks”, who also want the good things out of life. Many socialist countries had to build “Berlin Walls” to imprison their citizens because of this. And let’s not forget that most of the white “settlers” and refugees from neighbouring states migrated to SA because of the opportunities. In short, direct and indirect taxes need to be structured in order to maximise collections by the fiscus. In this regard, taxes include all imposts (including fuel levies, eTolls, etc) especially the administrative burden of dealing with SARS, CIPC, banks, etc which appear to be business-hostile and acting against job-creation.

Ditto, state spending should also be structured in order to maximise future collections, taking into account socio-political needs. So spending on ministers’ overseas junkets, “Nkandlas”, Omissions of Inquiry and Corruptheid is counter-indicated. Fixing education, fair price land reform and infrastructure would have been a “win”. One also has to wonder whether the social grants are enough; at their current levels the beneficiaries cannot be real “homo economicus” — consumers contributing to “demand” and hence creating jobs. While “Washington Consensus economics applies to countries with near-full employment, Keynesian remedies are called for when the real unemployment is closer to 50%

End of comments.

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