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Why tax collectors love sinners

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets.

Finance Minister Pravin Gordhan thought it amusing to give a shoutout to the sinners, who he said are “very dear to our hearts”. But relying on sin taxes for revenue creates a perverse incentive: if tax as a policy instrument works, revenue declines, so Gordhan is betting on that policy to fail.

A mere five years ago, the South African Budget for the first time exceeded R1-trillion. When Finance Minister Pravin Gordhan announced this, in 2012, Parliament cheered loudly, as one might expect from people who live on the taxpayer dime, and care little about the people they’re elected to govern.

This year, the budget exceeded R1.5-trillion, representing annual growth higher than the official inflation rate.

During that time, economic growth has come to a shuddering halt, dipping below 0% in several recent quarters. Despite a brief respite in 2015, price inflation has continued to creep upwards, to reach its highest level since 2009. Unemployment tightened its grip on the country, rising steadily to settle around 27%, the highest level in more than 10 years.

Although the 2015 Budget predicted that South Africa’s public debt to GDP ratio would stabilise by this year at about 43%, it has continued its sharp rise since 2008 to reach an all-time high north of 50%. This year’s Budget predicts that “government debt will stabilise at about 48% of GDP over the next three years”, but I wouldn’t take Mr Gordhan’s word for it.

Projected expenditure of R1.56-trillion exceeds projected revenues of R1.41-trillion by R149-billion, or 3.1% of GDP. But the shortfall on last year’s projected revenue was R30-billion, the highest it has been since Gordhan first took office in 2009. If this year follows suit, we’ll remain stuck with a Budget deficit of near 4% of GDP, as we have been since 2009.

Yet despite all this economic and fiscal misery, government continues to tax and spend. “To ensure that the state has adequate resources to fund existing spending programmes, government proposes to raise tax rates for 2017/18,” read the National Treasury’s Budget Review 2017. “Raising taxes when the economy is struggling is undesirable, but unavoidable, given the current fiscal circumstances. Government is acutely aware of the difficult economic conditions facing the majority of South Africans, but deferring tax increases by accumulating more public debt would ultimately impose a greater burden on citizens.”

In other words, we know it’s a terrible economic policy, but we won’t quit spending more money than we have and we’re not going to pay off our debt, so there’s only one thing left to do: keep squeezing more out of hard-working citizens.

Describing a putative increase in the VAT rate as “regressive”, Gordhan proposed a new top income tax bracket and an increase in dividend tax. Taking into account the paucity of public services by comparison with other high-tax countries, this will make South Africa’s rich among the most exploited upper classes in the world.

But then, until Gordhan switched to the ANC upon his first appointment as finance minister, he was a member of the South African Communist Party. That he thinks little of the capitalist class and favours a highly progressive tax which seeks redistribution from the rich to the poor is unsurprising.

However, despite his declared disapproval of regressive taxes, he also promised to raise the levy on fuel, as he does every year. That means, according to the Automobile Association, that fuel is now taxed at the astronomical rate of 35%. The fuel levy is priced into taxi fares. It gets passed on to consumers through product price increases. If you own a cheap old clunker, chances are you’re paying more for fuel than rich people with snazzy eco-friendly cars. There are few taxes more regressive than a fuel tax.

Gordhan also confirmed that Treasury would go ahead with its proposed tax on sugar-sweetened beverages, despite the fact that the government’s own research shows that even under the most favourable assumptions, it will have a neglible impact on public health. There is no indication that Treasury considered any public comments on the proposal, except the criticism that pure, unsweetened apple juice contains just as much sugar as a typical soft drink. His answer? Tax “intrinsic sugars” too.

This will affect not only pockets of consumers and the profits of the beverage industry, but also the livelihoods of sugarcane and fruit farmers. There is no indication that government has done any assessment of the impact its tax grab will have on these industries, which include many small farmers and employ many low-wage workers in rural areas.

The upshot will be that most healthy, natural drinks will get taxed alongside sweet beverages, by roughly 20% depending on sugar content. If you can afford to buy your juice from upmarket eateries that squeeze their own, or you can afford an electric juicer at home, you’ll be able to escape the tax. If you’re poor, however, your only option to avoid the tax is to switch to water, milk, coffee, tea, or artificially-sweetened drinks. And if you want sugar because you work hard and you need energy to burn, well, you can always fall back on sweets and baked goods. Not only will a sugar tax not work, but as with the fuel levy, it is regressive. This directly contradicts Gordhan’s stated principles concerning VAT.

When the inevitable paragraph came in which he raised taxes on alcohol and tobacco, Gordhan thought it wise to quip that sinners are “dear to our hearts”. There wasn’t much to smile about in the Budget, so perhaps he thought the audience needed a chuckle.

But his joke gives the lie to the notion that sin taxes are enacted for the good of the sinner. If they worked, to any significant extent, the government would lose key revenue streams, which it would have to make up either by ratcheting up taxes on companies and rich people, or by raising VAT.

By calling VAT regressive, but levying taxes on fuel, sugar, cigarettes and tobacco, Gordhan revealed not only hypocrisy, since they’re all regressive taxes, but also cowardice. It is easy to shame people and pretend you’re only acting in their best interests – even though they cannot see the benefit themselves. It smacks of paternalism and of exploiting vulnerable groups who cannot defend themselves against tax collectors.

When government needs more money next year, or the year after, as it does every year, do not be surprised to find a tax on salt or fat added to your sin taxes. After all, the Health Minister has already said he wants to regulate salt intake, contrary to all recent medical research on the subject. No doubt the Treasury has some great ideas on how to turn this intent into a win-win policy for the public purse.

When the Pharisees asked why Jesus was eating with tax collectors and sinners, he reportedly retorted, “Those who are well have no need of a physician, but those who are sick. I came not to call the righteous, but sinners.”

It’s appropriate that sinners and tax collectors are cast in the same light. Neither are righteous, and one preys on the other. Every year, government tries to jack up its always inadequate revenue by raising sin taxes. The ostensible reason is to discourage people from doing things that are unhealthy for them, or, if you’re a little more cynical, that might cost the public health sector unnecessary money.

As a policy instrument, such taxes have a debatable effect. The rich can afford sin taxes, so they are largely a burden upon the poor. For the poor, there are alternatives to dodge the worst impact of rising taxes, such as lower quality booze and black-market cigarettes. As noted before, even the research Treasury itself relies upon to justify its sugar tax expects only a marginal impact on public health.

There are also other factors that obscure the apparent relationship between higher sin taxes and lower consumption of tobacco and alcohol. Since the 1970s, fat consumption has declined alongside smoking and drinking, even though no taxes were levied. This was purely down to health recommendation by doctors, scientists, governments and the media. It is impossible to say how much of the decline in tobacco and alcohol use can really be attributed to taxation, and how much is due to improved public consciousness of healthy living, or other regulatory interventions that make it harder to enjoy smoking and drinking.

Besides, if these taxes worked as well as advertised, sin taxes would go down, which would land Treasury right back in the fiscal mess from which it is trying to extricate itself. Government cannot afford for sinners to stop sinning.

It’s not about public health, or about economic theory. It’s all about politics. Sin taxes are a cowardly way to raise government revenue without sparking too much public resistance. Instead of treating everyone equally before the law, the government goes after easily exploitable groups.

After all, who has any sympathy with drivers of fuel guzzlers, smokers, drinkers or fat people? Parliament evidently finds their predicament as government’s cash cows amusing. Gordan is clearly willing to sacrifice his principles about regressive taxes on the altar of populism. Perhaps he can raise a poll tax on immigrants next, to exploit the rising popular tide of xenophobia. That might buy the government another few years with its creditors. DM


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