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Rising debt, the fiscal deficit, and taxes

Will government, in desperation, introduce a wealth tax? A look at the backdrop against which the idea is being contemplated and the likely unintended consequences.
Government is eyeing the pockets of the wealthy while allowing rampant irregular expenditure at SOEs to continue without consequence. Image: Shutterstock
“We see the very wreck we must suffer, and unavoidable is the danger now.”
– Richard II, The Hollow Crown, Shakespeare

With the rising costs of ongoing corruption, the consequential costs of the pandemic, out-of-control zombie state-owned entities, the loss of excise taxes to the fiscus resulting from the cigarette and alcohol sales bans, and the disruption to travel and tourism, South Africa is likely to overshoot the revised deficit of R761.1 billion for 2020/2021.

While the Covid-19 virus spreads and mutates, the loss of lives and the impact on the economy will be felt for years to come.

Contingent liabilities arising from SOEs

State-owned enterprises (SOEs) present a spiralling fiscal risk.

Contingent liabilities are expected to reach R1 trillion by 2022/23 (according to the October 2020 Medium-Term Budget Policy Statement), stemming mainly from the financial woes of South Africa’s major state-owned companies.

SOEs are impacted by corruption, have poor internal control systems and rampant irregular expenditure. The government’s guarantee portfolio increased from R680 billion in March 2019 to R693.7 billion in March 2020. We will have to wait for the budget next month to see where it is sitting.

Many SOEs have ignored the October deadline for submitting their audited annual financial statements to Parliament. Where is the oversight and governance? Where is the consequence management?

Does the shareholder wait for a state-owned entity to default on a loan or bond before it realises that it is in dire financial straits?

Government has taken no action to rein in errant SOEs.

It is a fallacy that changing a board of directors will wipe out accumulated losses and accumulated irregular expenditure, and springboard the company into financial health.

Read: Taxpayers keep paying the price for policy inaction

South Africa is being fast-tracked into bankruptcy

Notwithstanding National Treasury’s view that SA is reaching its fiscal limits, in that increasing taxes will negatively impact growth, the country is being fast-tracked into bankruptcy.

Treasury may have no other option but to raise taxes.

Wealth taxes – annual versus one-off

The United Kingdom is considering a one-off levy on the wealthy. Its Wealth Tax Commission, comprising the requisite mix of skills in economics, tax law and administration, was tasked to gather the appropriate data and evidence, and to discuss and debate the design of a wealth tax. The ensuing report, ‘A wealth tax for the UK’, was published on December 9, 2020.

The commission concluded that an annual wealth tax in the UK would not work and that the existing taxes on wealth should instead be fixed.

It did however also conclude that a one-off wealth tax in the UK is feasible.

Is a wealth tax suitable for SA?

South Africa has rapidly rising unemployment. Pensioners, including those who are weak and ailing, queue for hours to receive their monthly government pensions.

Rather than take any accountability, it is politically expedient to raise a targeted tax on the wealthy.

South Africa already has wealth taxes such as capital gains tax (CGT), dividend tax, transfer duty, estate duty, and donations tax. Home owners and land owners already pay rates and taxes on property valuations.

Further, the South African Revenue Service (Sars) does not have the skill set to administer a wealth tax.

National Treasury should heed the UK Wealth Commission’s caution that: “Governments have made radical changes to taxes when there has been public understanding that change is needed.”

In SA, the criminals who have plundered the state and the poor obscenely display their ill-gotten wealth in the public eye.

Covid-19 has provided yet another opportunity for theft, which has destroyed the health service, put health care workers in harm’s way, and resulted in loss of lives. The procurement of Covid-19 vaccines remains an ongoing sordid saga.

Read: Madonsela and WHO boss slam Covid-19 corruption in SA

A wealth tax will result in a far greater economic cost of diminished savings, and loss of foreign direct investment. There will also be a rise in tax-aggressive structures that will disguise wealth and earnings. There will be a continuing migration of wealth offshore and emigration.

“If you’re skating on thin ice, you might as well dance,” said American writer Anita Shreve.

And so our government dances – at funerals, at rallies, and on the steps of Parliament.

Read: Expect a lower tax shortfall – HSBC

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When you have a broke As* country driven by inept politicians that enrich themselves and their families the only OPTION is to KEEP RAISING TAXES on those few left working. THIS IS PURE SOCIALISM AT WORK AND WE ALL KNOW WHY SOCIALISM FAILS JUST ABOUT EVERYWHERE IT IS PRACTICED!!

I propose a Corruption Tax where every registered ANC member, past, present and future, forks over 10% of their gross income for the next 60 years. They can also pay a special VAT subsidy of 5% on top of the current rate and, say, a special “interest levy” on top of any of their borrowings. Just a thought.

A little bit of in your face, yes we know the stats we know the numbers yet we see little action as the consequence of poor governance does not effect the politicians.

More than 2 years of Commissions, 21 years since the Arms Deal and what justice has actually be delivered. NOTHING.

Expropriation Through Inflation, Wealth Tax and Expropriation without Compensation surely delivers growth and narrows inequality. This is what the ANC and Voters believe. Somehow Stealing creates value whereas it really is value destructive.

Mother Nature is fighting back without discrimination, make no mistake she is the great equaliser.

Progressive taxation and taxes on capital formation are infringements of property rights. Socialist policies got us in this mess, more of it certainly won’t offer the solution.

The radical change we need is a move away from socialism and the infringements of property rights, to embrace a market economy with property rights and the rule of law. The various redistributive ANC policies are legalised plunder. No economy can grow when plunder is legalised by the collectivist, to be enforced by the courts and the police force, for the benefit of the collectivist. Savers are flocking offshore as economic refugees. Unfair taxes drove the Voortrekkers over the Drakensberg, now it drives them over the Atlantic Ocean.

Our economy will deteriorate further as long as we have BEE, cadre deployment, redistributive taxes on capital formation and organisations of economic destruction called SOEs. Hyperinflation will deliver the “terrible lessons of catastrophe”.

“When misguided public opinion honours what is despicable and despises what is honourable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns it’s back on progress and can be restored only by the terrible lessons of catastrophe.”

― Frédéric Bastiat, Economic Harmonies

I doubt the ANC will take anything from the UK Study. They’ll tax the wealthy cause they can. Legal theft, the ANC members feel they are due the ‘income’ cause of their struggle credentials, it’s pay back time and that’s how it is.
However Internationally; Investors and IMF see things differently and SA will not reach that sweet spot of FDI that’ll create jobs, tax revenue and the like.
These ANC members don’t understand that the pie is shrinking and there’s less to divi up. Once we reach the tipping point then they’ll as well turn on each other, we’re starting to see it with all this faction/unity speak

“The lunatics are running the asylum”

I think President Mbeki must be muttering these words daily

Mbeki specialised in muttering. But lest we forget, his authoritarianism, race rhetoric and constant sparring with the media – both directly and via his attack dog Essop Pahad – directly caused the populist backlash within the ANC branches which removed Mbeki from Tuynhuys prematurely. And brought Zuma to power.

The definition of wealth is a tricky thing in a country where a government employment contract, or connections to someone who has one, is worth more than a government bond.

At the Zondo commission, they testified that the ANC stole R9 Billion from the State Security Agency…

This is just the tip of the ICEBERG.

–> Any measures put in place (higher whatever!) –> will not achieve any sustainable growth in the long run!

Methinks that the ANC and its supporters deserve every bit of misery coming their way shortly !!!

PEP came up with a brilliant idea…. lay by buddy scheme? what will work for one will work for all, right?

Dammed if you do and dammed if you don’t. Poor Tito. Tough decisions ahead and he likes to be Mr fun.

End of comments.

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