MAVERICK BUSINESS

The Purple Cow’s basic income plan is either genius or a bovine patty

By Reg Rumney 25 March 2019

The Negative Income Tax, says the Capitalist Party of South Africa’s Kanthan Pillay, ‘is our riposte to the constant clamour for the Basic Income Grant’. It is a proposal, he says, to conquer unemployment, especially in the light of the effect on jobs of the Fourth Industrial Revolution.

I wonder where informal sector workers, such as those who have marketed the party’s purplecow.mobi website, fit into the radical tax change proposed by the new Capitalist Party of South Africa, the ZACP?

These informal sector workers have been displaying placards with the distinctive Purple Cow symbol at Joburg’s northern suburbs’ intersections, in a campaign devised and run by Sarah Britten Pillay.

It was one of those placard carriers with a Purple Cow on it who earnestly pleaded with me to visit the purplecow.mobi website, where a series of videos present the ZACP’s answers to what it considers burning social problems.

What intrigued me most was video 10, Fixing Social Welfare, that suggests South Africa introduce a “Negative Income Tax”. This means of providing a basic income, of which conservative economist Milton Friedman was a proponent, promises to simplify social welfare and provide a guaranteed basic income.

Would John, and some of the millions of informal, below-the-radar workers, be able to score from such a tax? As the video explains, up to a certain level of income, the government pays you a percentage — the tax rate — of the difference between your earnings and that income level. Above the income level, you pay income tax at the same rate.

The video uses as an example a level of R6,500 a month or R78,000 a year and a tax rate of 50%. Around R78,000 in our present tax system is the tax threshold level, which the government adjusts for inflation and age, and below which income earners pay no tax at all.

In the case of say, a cashier who earns the new minimum wage of R3,500 a month, 50% of the difference between her salary of R42,000 a year and the cut-off level would be R36,000. Halve that to get R18,000, or R1,500 extra a month.

For the working poor a Negative Income Tax would be a big benefit — especially if, as Friedman suggested, it should go to those with no income at all. A jobless person would get R3,250 for no effort at all, almost double the amount of the biggest social grant, the older person’s grant, of R1,700 a month.

If an employer received a dispensation to employ someone for less than the legislated minimum wage, say R2,000, she would get in total R4,250, a welcome boost — except that it is not certain informal sector workers would be able to benefit from a scheme that relies on formality.

A Negative Income Tax would satisfy Adam Smith’s principles of tax, the ability to pay (in proportion to income), certainty, convenience and efficiency.

What about the wealthier members of society? In the Negative Income Tax model, according to the purplecow.mobi video, you start to pay tax to the government if you earn more than R78,000, on the difference between your earnings and R78,000. Using the figures in the purplecow.mobi video for convenience’s sake, someone earning about R15,000 a month would be paying around two-and-a-half times more under the Negative Income Tax.

For a wealthy individual earning R125,000 a month, the Negative Income Tax would mean a leap in tax from roughly 36% to 47%, almost one-and-a-half times more. This would be a hard sell, so the rate would have to be adjusted down, meaning less benefit for lower-income workers, or the tax rates would have to be adapted in some way so as not to punish the middle class — or raise income tax too high. South Africa is the ninth most highly taxed country in the world in terms of taxes on income and profits.

Another problem would be the sheer cost. Just taking the latest number of unemployed and discouraged work seekers, nine million, who by definition have no income, I calculate the cost of the Negative Income Tax to be around R360-billion, almost double the present amount spent on all grants of around R163-billion.

This is one problem with a pure Negative Income Tax, which is why Kanthan Pillay of the ZACP explains that it would apply only to those with jobs, the idea being to incentivise people to work. In that sense, the Negative Income Tax then rather more resembles the Earned Income Tax Credit of the United States. The Earned Income Tax Credit works somewhat like the Negative Income Tax. It is, however, a tax credit for low-income and moderate-income earners. As is explained in a National Public Radio Planet Money podcast, it does put money in the hands of poorer working people in the US.

The purplecow.mobi video seems to say a Negative Income Tax would enable the government to ditch other social welfare-like grants, but Pillay concedes this wouldn’t be possible.

The Negative Income Tax, Pillay says, “is our riposte to the constant clamour for the Basic Income Grant”. It is a proposal, he says, to conquer unemployment, especially in the light of the effect on jobs of the Fourth Industrial Revolution.

Pillay notes that the Negative Income Tax or some version of it for the working poor would help make South African labour more competitive and pay a reasonable wage at the same time. The problem as he sees it is that our labour regulation makes manufacture in South Africa, especially in the clothing industry, uncompetitive.

We have fair labour laws: The Chinese don’t. We pay $2 an hour: They pay $2 a day.” He says that regulations would be necessary to ensure big companies do not game the system to underpay workers.

A Negative Income Tax would obviously need to be tweaked to work, but the more tweaking the further it moves from the Adam Smith principles and the more complex to implement.

Governments like Value Added Tax because of its simplicity and convenience for the tax man. The Negative Income Tax would work better if the labour pool were larger. The Earned Income Tax Credit works in the US because the unemployment rate is so low compared with South Africa’s official rate of 27% (expanded to 40% by adding discouraged work seekers). A Negative Income Tax confined to the employed, a version of the Earned Income Tax Credit, would only work if it was accompanied by other reforms designed to encourage increased employment, as outlined by Nicoli Nattrass and Jeremy Seekings in Daily Maverick.

Without the focus on employment, the Negative Income Tax seems in some ways little different from the Basic Income Grant it is designed to counter, and the Basic Income Grant, with other cash transfers, has slowly moved from the fringes to the mainstream, even being discussed at the rich man’s club the World Economic Forum. Implementing the Negative Income Tax would have to deal with the problem of proving income in the informal sector. Effectively formalising those who work outside the formal economy provides another layer of bureaucracy, the kind that basic income plans are designed to avoid.

And implementing radical taxes is the opposite of trivial.

Emma Rasmussen, in an academic paper on the desirability of a Negative Income Tax in South Africa, concludes that it “… can have a significant impact on both poverty and inequality levels, but… at a high cost” and it would entail “a serious financial and political commitment from the South African government”.

So would a Basic Income Grant, a single amount, payable to all without exception, covering the informal placard holders and cashiers alike, and possibly providing a simple tax credit for the wealthy. Both the Negative Income Tax and the Basic Income Grant for some proponents would imply cutting back on other social welfare.

Politically, this is not so easy. It is easy to introduce benefits, such as the child care grants, but not so easy to take them away — another reason why a Negative Income Tax or a Basic Income Grant or any version of the Earned Income Tax Credit would probably supplement the social welfare we already have. DM

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