A social contract in need of repair

South Africa needs an accountable democracy and ongoing engagement around tax.
The country started the year in a recession, ‘and then the coronavirus came like a tidal wave’. Image: Shutterstock

On the opening day of Tax Indaba 2020 on Monday, Keith Engel, CEO of the SA Institute of Tax Professionals, raised many important points in the continuing tax policy debate between government, the private sector, taxpayers and institutions.

The Tax Indaba brings together representation from government, National Treasury and the South African Revenue Service (Sars) as well as international bodies such as the Organisation for Economic Co-operation and Development (OECD), and creates a platform where “we can grow and learn together” and connect and engage.

Engel says engagement on tax legislation, customs legislation, Department of Trade, Industry and Competition (dtic) incentives, and the role of the OECD, is important.

The South African economy started the year in a recession. Engel referred to the “Zuma malaise” and said “we were struggling economically … and then the coronavirus came like a tidal wave”.

The deficit

South Africa’s massive debt deficit has to be funded, which necessitates various options, making cuts, or raising taxes, or growth. But growth requires capital. Government will have to raise enough money to pay off the interest and fund growth, said Engel.

The economic background affects tax quite a lot. “One can talk about theory all day long, but the bottom line is, theory is driven by practicality … when people are in trouble economically, they start feeling more envious about the wealth …

“When [the need for] money becomes desperate, government theories become more desperate.”

This will impact tax policy. Some economists say the real recession will come when the country has to face up to all its debt. “Recessions are shock events … they typically happen every 10 years, we need to plan that there will be seven lean years and three hard years,” said Engel.

Many overseas countries live with much higher deficits, but rating agencies believe that these countries can handle the deficit.

Taxing conundrum

It will be difficult to raise taxes. Finance Minister Tito Mboweni in the February budget said that raising tax rates won’t work. Raising tax rates will negatively impact growth.

Engel mentioned the strong drive to tax the rich, mentioning as an example the solidarity tax – an additional tax levied on residents to fund social projects and which could be levied on assets instead of on income. However this is still a tax on the rich.

It is an international phenomenon that the gap between the rich and the poor is growing. Covid-19 accelerated the gap.

When the economy is down this creates a strong drive for socialism, yet “when the economy is up everyone believes in the free market”.

Talk of taxing the rich creates capital flight. Many people are leaving. Engel said that this is also seen in the US, where the number of emigrants is the highest ever.

There is also talk of raising small taxes, such as fuel taxes and hotel taxes.

Sars is pushing ‘friendly compliance’, by, for example, increasing the efficiency of its systems and third-party reporting to ease the burden of tax compliance. More data systems will be cross-checked to make the system efficient.

Sars is, however, facing many challenges, such as the ability to audit. Sars should go after the ‘right things’, where entities have two sets of books, transfer pricing, or tax avoidance.

The broken social contract

Tax evasion is a big issue. One of the issues to be faced is the ‘social contract’. This is not only the obligation to pay taxes, but also to collect all taxes. Outright tax evasion undermines the whole system.

Engel said one can see that Sars is trying hard. But Sars cannot do this alone, government is part of that social contract.

“Corruption is undermining our society, and why pay tax if this is just to feed some bureaucrat? Or to feed someone who is out there to steal?”

Engel also referred to tender corruption, and the fact that tenders are awarded to families and friends. ‘Jobs for pals’ enables people to get jobs for the wrong reasons, and this results in an unskilled workforce in government. The unskilled are then driving the system.

The implementation of civil service exams will ensure that one cannot join the civil service unless one has the competency.

Government-owned companies are not independent of government, have no accountability, pay bloated salaries, and offer jobs for pals.

Engel questioned how government can increase salaries when the private sector is cutting salaries.

South Africa needs an accountable democracy, he said.

New sources of raising taxes

Engel mentioned new sources of raising tax, such as:

  • The tenderpreneurs;
  • Taxing those businesses that operate outside the economy, such as the cash economy;
  • The illicit economy, such as non-payment of excise taxes (cigarette smuggling, alcohol), and illegal substances;
  • The semi-legal economy, for example, where a business keeps two sets of books, or does not report income, or undeclared offshore funds.

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ANC leads SA into a total and abject failing state !!!!

Just as they did with the Freedom Charter, the ANC used it to smoke zoll with, so they have with the social contract. It is completely broken.

The ANC cannot make SA modern industrial economy. It will need to be some other party.

”The avoidance of taxes is the only pursuit that still carries any reward”

John Maynard Keynes English Economist (1883-1946)

The ANC corruption stole most of the taxes – I think, they are well aware that when robbing Peter to pay Paul, they can always depend on the support of Paul!

A contract is only worth the name when both parties benefit. If only one party benefits, it is extortion. In SA there is therefore no social contract. We, the small number of taxpayers, get zilch for our taxes, which are stolen or wasted. Therefore, the contract no longer exists. There is no moral imperative to succumb to extortion.

Incitatus you have it correct congratulation on telling it as it is.

Hear Hear, congratulations on telling it as it is

“Engel also referred to tender corruption and the fact that tenders are awarded to families and friends. ‘Jobs for pals’ enables people to get jobs for the wrong reasons, and this results in an unskilled workforce in government. The unskilled are then driving the system.”

Oh dear Mr Engel, I’ve been bleating on about this for years. I’ve even created the acronym “F&F”… sigh..

And please tell us as the meme going around asks: “How SARS can trace every single Rand in any account (to calculate the tax you owe) but they can’t help the government trace R500 billion?”

Good article from Barbara C, with discussion that makes sense. We agree.

However, what we need is the “political will” from the ANC. That is lacking.
We the public regularly come forward with sound economic & social solutions…but if its not ‘palatable’ for the ANC, you’re going to hit a brick wall in frustration.

Read an article somewhere by Sowetan columnist, Prince Mashele, where he said (western centric) value system of ‘accountability’ has little place in the true African leadership sphere within (especially rural) kingdoms/chiefdoms/indunas, where a subordinate ordinary citizen would uncalled for to ‘question the king’ (or leader) for any corrupt spending. Zuma’s Nkandla came to mind, at the time.

(ANC’s main aim is to keep The Party in power, everything else is secondary..) Hence RW Johnson’s remarks “SA can have the ANC, OR a western industrialised economy. It cannot have both”.

But those that uphold the western value system, are all in the minority….we’re not in the count. African value system will supersede SA’s current (but waning) western value system, with SA’s hallmarks being likened to a (shrinking) “European outcast at the southern tip of Africa”. Can accept that, but then majority will have to accept, for the next generation of Saffas to come your kids will have to live without western-centred lifestyle we grown accustomed to. Water from from taps cannot be taken for granted. Only 60% of Africa is electrified (In SA, most of the country is electrified, but we’ll have to share or shed the power to others….the “end” of western SA, and the beginning of true Africa). Many elites/cadres/BEE beneficiaries will not like true Africa….as western-centred life is still very comfortable in SA, compared to rest of continent.

The picture says it all. There is a tsunami coming. No one should pay a cent of tax as long as industry’s such as the taxi industry can ‘unsubscribe’ from paying tax and Government seems unconcerned about a massive industry (R100bn) not contributing their bit. If that is the case consider my industry part of the taxi industry.

Article reads like a wish list. This government does not have the capability or capacity to govern.

But I’m not too sure I trust the tax ‘professionals’ either – practitioner audit thyself, etc. All the gazillions floating around and disappearing: this happens with the help of ‘structures’ and ‘interpretations’.
I don’t think the answer is going to come from the co-accused in this matter.

If the USA is anything to go by, we’re all heading towards socialism and what that brings, Tax was – is – supposed to be on of the equalizers in the wealth gap, Tax itself is not the issue it is how governments spend that to me is the issue.
If spending exceeds income from tax, then government borrows this becomes toxic, as the rich/well off/super rich/elite are the ones lending to Government and then taking a cut on the Government spending.

Review and reform tax yes please, however better to work out how Government is financed and better spending plans, and of course less corruption…

sa needs a new government and urgent attention to eskom,

Copy Paste Quote Mark J. Perry, i am only doing this because I could not have said this any better. It is seriously time to wake up or accept your own suffering.

1. Socialism is the Big Lie of the twentieth century. While it promised prosperity, equality, and security, it delivered poverty, misery, and tyranny. Equality was achieved only in the sense that everyone was equal in his or her misery.

In the same way that a Ponzi scheme or chain letter initially succeeds but eventually collapses, socialism may show early signs of success. But any accomplishments quickly fade as the fundamental deficiencies of central planning emerge. It is the initial illusion of success that gives government intervention its pernicious, seductive appeal. In the long run, socialism has always proven to be a formula for tyranny and misery.

A pyramid scheme is ultimately unsustainable because it is based on faulty principles. Likewise, collectivism is unsustainable in the long run because it is a flawed theory. Socialism does not work because it is not consistent with fundamental principles of human behavior. The failure of socialism in countries around the world can be traced to one critical defect: it is a system that ignores incentives.

In a capitalist economy, incentives are of the utmost importance. Market prices, the profit-and-loss system of accounting, and private property rights provide an efficient, interrelated system of incentives to guide and direct economic behavior. Capitalism is based on the theory that incentives matter!

Under socialism, incentives either play a minimal role or are ignored totally. A centrally planned economy without market prices or profits, where property is owned by the state, is a system without an effective incentive mechanism to direct economic activity. By failing to emphasize incentives, socialism is a theory inconsistent with human nature and is therefore doomed to fail. Socialism is based on the theory that incentives don’t matter!

2. The strength of capitalism can be attributed to an incentive structure based upon the three Ps: (1) prices determined by market forces, (2) a profit-and-loss system of accounting and (3) private property rights. The failure of socialism can be traced to its neglect of these three incentive-enhancing components.

3. By their failure to foster, promote, and nurture the potential of their people through incentive-enhancing institutions, centrally planned economies deprive the human spirit of full development. Socialism fails because it kills and destroys the human spirit–just ask the people leaving Cuba in homemade rafts and boats [and those waiting in long lines today in Venezuela struggling, and often failing, to buy food].

4. The temptress of socialism is constantly luring us with the offer: “give up a little of your freedom and I will give you a little more security.” As the experience of this century has demonstrated, the bargain is tempting but never pays off. We end up losing both our freedom and our security.

Socialism will remain a constant temptation. We must be vigilant in our fight against socialism not only around the globe but also here in the United States.

The failure of socialism inspired a worldwide renaissance of freedom and liberty. For the first time in the history of the world, the day is coming very soon when a majority of the people in the world will live in free societies or societies rapidly moving toward freedom.

Capitalism will play a major role in the global revival of liberty and prosperity because it nurtures the human spirit, inspires human creativity, and promotes the spirit of enterprise. By providing a powerful system of incentives that promote thrift, hard work, and efficiency, capitalism creates wealth.

The main difference between capitalism and socialism is this: Capitalism works.

Please when contributing here, limit your submission to 100 words. I don’t have time to read a whole dissertation…

George Mabuza BoomBang : Find an EFF Site for your “input” :

That’s below the belt, disclosing peoples identity. Moneyweb should sensor such posts. That’s regrettable.

Mr Boombang, your self acknowledged inability to follow more than a couple of one syllable words already outed you as EFF. Spare Moneyweb readers the agony of your opinions and post them on twitter, following your leada.

What they need to is to lower tax rates, then there will be less opportunity for corruption because government budget will be very tight, and less evasion since tax payers will not feel the need to cheat. Tax rates are simply too punitive. Excessive taxation increases corruption, and ultimately results in less economic growth, and less revenue for the state.

A gangster state has evolved, through the corruption across government and business, these past ten years. Gangsters don’t, as a rule, pay tax. SARS will have little chance raising anything, other than the middle finger, from the tenderpreneurs, Covidpreneurs, cash and illicit economies.
Russia’s Putin has a way of getting the Oligarths to “donate” to desperate causes, like Covid. Maybe our head gangsters can do the same with the South African equivalents?

Indeed a big part of this contract is to restore law and order. Most people are horrified at seeing red berets running amok in shopping centers chasing customers and staff out of shops that they have issues with. The gangsters operate openly and without fear of any retribution.

Tax the Aston Martin first. Then we’ll discuss compliance

Tax evasion, Tax evasion, Tax evasion, we hear it almost every day.

We hear and read almost everyday in the news about corruption in Govt.
Is that not the most likely place where Tax evasion is taking place?

The average South African is already super taxed.
Please apply the 20/80 rule, 20% effort = 80% rewards.

Every tax Rand is used by the ANC Commies against the interests of those who pay it. Therefore : We know what to do.

Remember that the ANC uses it’s children in the EFF to sidetrack the media from the real issues when things get a bit too tight for the ANC. e.g. the Click faux rage from cheesekop Malema

The media unfortunately falls for it hook, line and sinker every time.

Nothing will ever be repaired by the ANC or EFF.

Their language is that of anarchy and destruction.

End of comments.

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