Business Day column: Later Tax Freedom Day sounds a warning

01 June 2016
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TAXPAYERS are rich, the rich pay most tax, and rich companies pay the rest. That is why most people are unmoved by the idea that government inefficiency, waste and corruption occur "at the taxpayer’s expense". That the government is extracting more revenue from the economy than ever before, therefore, must be good for "the poor" because taxes are redistributed from "the rich".

Really? Is that how things work? Not quite.

Today, May 25, is Tax Freedom Day. It represents the day of the year on which our money becomes ours rather than that of the government. It is 43 days later this year than it was in 1994, when it came on April 12. Later than ever before — the government is taking more and more of everyone’s wealth. Nearly 40% on average. If we divide the total income of all South Africans by the number of days of the year, government takes, in effect, the first 145 days of our income.

Working-class people, welfare recipients and those who cannot be considered rich at all, do not agitate about confiscatory taxes because they get duped into thinking they pay little or no tax. But they are all taxpayers. For them to be alive, they or someone on their behalf must have spent on food, shelter, transport or clothing. And the government took varying amounts of that money through value-added tax (VAT), import duties, excise duties, levies and other indirect taxes. They constitute the second biggest source of revenue, about 30%.

"Company tax" contributes nearly 20% or a fifth of government revenue. But a company is an abstract concept called a "juristic person" or "legal fiction", so who in fact, pays the tax? Who is worse off because of it? If, as recommended by Prof Brian Kantor, company tax were abolished, who would benefit most: shareholders, managers, labourers, financiers, suppliers, charities, marketers, distributors, consumers, government or someone else?

Since such costs as company tax drive prices to levels that ensure relatively constant rates of return, most company tax is in effect paid by consumers. Since most sales are to middle-and low-income consumers they, not "the rich", pay most company tax and the workers pay all tax diverted from wages and benefits.

More than 35% or a third of government revenue is from personal income tax. Since few people earn "high" and many earn "low" incomes, the numerical effect is that middle-and low-income earners pay most personal tax.

There are many other ways in which the poor are adversely affected by soaring taxes. Since the yield on government spending is negative or lower than private sector yields, the government is a net consumer of wealth. High taxes, therefore, retard growth and prosperity. That is why poor people risk and lose their lives to migrate to prosperous low-tax countries.

The famous Laffer curve explains the paradox that high tax rates yield diminishing returns — down to zero revenue at 100% tax rate. Highly taxed countries stagnate and have less revenue for welfare. Sweden, for instance, abandoned high taxes to end stagnation and declining welfare benefits.

High taxes are also "regressive"; they discriminate against poor people. The same VAT rate on a R100 T-shirt, blanket or movie ticket consumes a bigger proportion of a poor person’s income than of a rich person’s.

A late Tax Freedom Day is worse for poor than for rich people because rich people can afford it. High net-worth people maintain high living standards regardless of tax rates. A late Tax Freedom Day discriminates against poor people because the only way for them to become rich is through retained income.

There are many compelling reasons for the government to cut spending and reverse the trend towards an ever-later Tax Freedom Day.

Louw is executive director of the Free Market Foundation

This article was first published in Business Day on 25 May 2016



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