With every passing year, taxes increase. This is inevitable in a country where the government is too large, inefficient and wasteful, and where even the tax collection service itself has been sabotaged by greedy and corrupt government officials and their cronies.
In the last year, the increases have mostly come via new taxes on sugar-sweetened beverages, higher excise taxes and an increased fuel levy.
When it announced the national budget earlier this year, the National Treasury complained of a large and growing revenue shortfall, caused by administrative weakness in tax collection and the negative impact that low economic growth has had on personal income and company profits.
It also complained about “new expenditure pressures”. In addition to the usual wasteful expenditure on vanity infrastructure projects, tens of billions are being poured into free tertiary education for a small elite, and even more is being sunk into the mire of decrepit, corrupt and failing state-owned enterprises.
There’s R209-billion in the budget for “economic development”, which includes things such as innovation, science and technology, job creation, industrialisation and exports.
These are things that the private sector is good at, thanks to competitive pressure, but that the government is not, because it operates as a monopoly. Government has no business taking money from productive people and businesses, and diverting it to where bureaucrats think it can be better invested.
A vast amount – R1.1-trillion – is being spent on social services that include an education system which largely produces illiterate, innumerate and unemployable youth, and a crumbling health care system characterised by broken equipment, lack of doctors and nurses, and shortages of critical medicines. The only social service that one might argue produces some good are social grants for childcare, the elderly and the disabled. Without them, the poverty perpetuated by public policy would be far more deadly.
There have been high-profile calls for a tax boycott. Former Western Cape premier Helen Zille has advocated a tax revolt, although she insists it can be done by legal means to reduce tax assessments, such as charitable donations or investing in approved start-up funds. However, a growing number of taxpayers have lost faith in the government, and tax officials say they are starting to withhold taxes due to the fiscus.
Many wealthy South Africans are simply emigrating. Between 2012 and 2017, the country lost almost a quarter of citizens worth more than $5-million. They take with them an outsized share of the country’s taxable income, as well as crucial skills and job-creating businesses.
It is hard to evaluate the extent of the tax burden on South Africans. In simple figures, the National Treasury says tax revenue amounts to R1.3-trillion out of a GDP of R4.9-trillion, which puts it at 26.5%. It also says tax revenue amounts to R1.4-trillion, which makes it 28.6%. Which it is, is anyone’s guess. If you look at consolidated government expenditure, we’re talking about a significantly higher amount of R1.8-trillion, which is 36.7% of GDP.
Wikipedia says it’s 26.9%, so let’s go with that, because perhaps that will give us consistent comparisons with other countries. At first glance, South Africa’s tax burden doesn’t seem extraordinarily high. Out of the 180 countries on the Wikipedia page of countries by tax burden as a percentage of GDP, South Africa ranks 79th. Notably, the average tax burden for the EU is 35.7%, and for the OECD club of free and successful countries, it is 34.8%.
First glances can be deceiving, however. The successful countries with higher tax burdens are significantly wealthier than South Africa, and are much better governed. Their citizens are for the most part employed in high-earning jobs. They enjoy luxurious public services, free healthcare, excellent education outcomes and generous social safety nets in return for their taxes. Their governments are, by our admittedly rather low standards, efficient and honest.
Despite their prosperity, earned over decades through free trade and free markets, growth rates in those countries, especially in the EU, have stagnated around an anaemic 2% as the region’s tax burden increased.
Among African countries, only our customs union pals Namibia, Botswana and eSwatini (formerly called Swaziland), along with the failed state of Zimbabwe and the small island nation of Seychelles, have a higher tax burden relative to their (far smaller) GDP.
If you categorise countries according to GDP per capita, which I did by dividing that list into fifths, South Africa’s tax burden ranks 10th out of the 35 countries in the third quintile. Countries with higher tax burdens in our GDP-per-capita ballpark are Timor-Leste, Bosnia and Herzegovina, Eswatini, Guyana, Albania, North Macedonia, Namibia, Ukraine, and Jamaica.
None of them could be even charitably described as economic powerhouses. Among South Africa’s BRICS partners, only Brazil has a higher tax burden. India’s tax burden comes in at a mere 16.8% of GDP, Russia’s at 19.5%, and China’s at 20.1%. Guess where the economic growth is? Not in South Africa (0.7% in 2018) or Brazil (1.1%), but in India (7%) and China (6.5%). At 2.3% growth, even corrupt Russia did more than three times as well as South Africa. There is sound evidence to suggest that the higher the tax burden, the lower the economic growth, and vice versa. This holds true in the US, and is also illustrated by this series of correlation charts for countries worldwide.
A study conducted in Vietnam confirmed the inverse correlation between economic growth and the tax burden. It found that the country’s tax burden of 22.4% was too high, which impacted negatively on economic growth by comparison with neighbouring China. The authors concluded that the tax burden should be cut, and the government’s spending is unsustainable in terms of the economy’s ability to pay for it. This will improve consumption, and more available capital will boost investment, production and business in general. To reduce the pressure on the state budget, state-owned enterprises should be scaled down, since they are less efficient than their private
sector counterparts, contribute less to GDP and create fewer jobs, but require far higher investment.
There’s more to it than that, though. A study among Central and Eastern-European countries found that while all forms of tax have a negative effect on economic growth, personal and corporate taxes had the highest negative impact, while property and consumption taxes had the lowest negative impact. Empirical evidence from the OECD confirms this, showing that property taxes are the most growth-friendly, followed by consumption taxes. Income taxes, and especially corporate taxes, have the most negative effect on economic growth.
Now consider South Africa’s tax revenue distribution: Personal income tax contributes by far the highest share of taxes. It contributes 39% of tax revenue, but is paid by only 13% of the population. Two-thirds of it is paid by the very rich and the upper class, earning more than R500,000 per year (which is less than half of a member of Parliament’s salary), and the rest is paid by the middle class.
Combined, personal and corporate taxes contribute 55% of all tax revenue, with another 14% being derived from customs tax, excise tax and fuel levies. Only 25% is a direct consumption tax, and property taxes make up a small share of the 6% “other” category. Besides taxes, there are a myriad of fees and licences payable to do business in South Africa. This means a focus on just the tax burden ignores a substantial additional drain on the economy. The government takes its cut from everyone trying to do business, much like a mafia protection racket.
If the government wants to rekindle economic growth, as it says it does, it should stop trying to tax and spend its way there. That is a recipe for failure. It should start by cutting all non-essential spending from the budget, and that includes most of the more than R200-billion allocated for “economic development”.
It must not only turn around state-owned enterprises, but it should aggressively get rid of non-performing assets, including SAA, Denel, the SABC, much of Transnet and significant parts of Eskom. There are hundreds of public enterprises. Why the government owns a diamond mine, for example, is beyond comprehension. It must cut red tape, fees and licences throughout the economy. Even without cutting its own expenditure, however, judicious tax cuts would give a welcome lift to the economy. A rising tide lifts all boats, including tax revenues. Much can be done to change the tax bias to a pro-growth formula, with higher property taxes and VAT, but lower corporate and personal taxes. The fuel levy has consequences throughout the economy, for rich and poor alike. It should not be seen as a revenue instrument, as it was in the last budget, but merely as a way to fund road infrastructure maintenance. Taxes on dividends and capital gains should be entirely eliminated. Economic growth is dependent on more of those, not less.
Experts are gathering this week in Sydney, Australia (23-26 May) for the World Taxpayers Associations 17th Biennial Conference, held in conjunction with the Australian Taxpayers’ Alliance and the Australian Libertarian Society’s 7th annual Friedman Conference. Guests will hear from over 100 speakers from around the world on campaigns and policies to advance limited and accountable government worldwide. Hopefully, some of the ideas aired at the conference will filter through to South Africa.
No doubt the conference will highlight what we already know: more tax doesn’t make everything better. It’s just more tax, which reduces economic growth. The people who end up paying the most for this folly are the ones who can least afford it: the poor and the unemployed.
We also know that more tax leads to unintended consequences. It raises the cost of doing business and reduces demand, which inevitably leads to job losses. It also stimulates the illegal trade in medicine, food, alcohol and tobacco, which circumvents the tax to begin with. As a consequence, governments invariably go from asking for too much tax to having no tax at all, because black markets cannot be taxed.
Instead of trying to find new ways to tax South Africans, the government should be looking for ways to reduce the tax burden. That means letting go of the failed “developmental state” ideology, which is really just a code-word for socialism, and recognising statistical facts that link lower taxation with higher economic growth.
Only in a thriving economy will we see improved rates of small business creation and growth, and that – not in showy public works, nor even in big business – is where the engines of job creation and broad prosperity are located. After 25 years of putting plasters on poverty and failing to create jobs, the government should cede the field to the private sector – and it must start by not taxing it to death. DM
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