Any tax hurts the poor the most

22 June 2017
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Low-growth and the resulting decrease in government revenue around the world, but especially in South Africa, has led to increased calls for higher taxes on the rich. The mantra is that benevolent governments will redistribute this wealth and thus help the poor escape destitution. However, history has demonstrated that imposing heavy taxes on productive individuals and companies is a simplistic notion of how to redistribute wealth and does wide untold harm. Rather the key to permanently reduce poverty is to adopt policies that promote economic growth and expand opportunities for the unemployed. 

Taxes imposed on income and earnings have the predictable effect of reducing income and earnings for their intended beneficiaries. Entrepreneurs are robbed of the incentive and potential zeal to risk money, time and energy on starting new businesses or expanding existing ones. But these entrepreneurs are not the ones who suffer the most.

It is the workers, who, at the end of the month, must be satisfied with stagnant wages because their employers are spending ever-more money on complying with new and higher taxes as well as the plethora of regulatory costs associated with doing business in South Africa. Employers do not pay higher taxes out of their pockets – they ensure the business itself covers that – which means less disposable income for workers and higher prices for consumers.

Less disposable income for workers means less saving, less saving means less capital formation, less capital formation means lower labour productivity, and lower labour productivity means lower real wages and economic growth. And while workers are faced with less disposable income, they must also pay higher prices for goods and services because of these very same taxes.

It is not government, but private firms and individuals that generate wealth and cause the economy to grow. Government cannot create new purchasing power out of thin air. The mistaken view that fiscal stimulus can pull economies out of recession persists because the jobs created through government ‘make-work’ programmes are clearly visible. What we cannot see are the jobs that would have been created elsewhere in the economy with that same money had it not been taxed or borrowed by government.

As Frederic Bastiat would say, ‘what is seen’ with new taxes is an increase in government revenue and thus increased social spending. But ‘what is not seen’, which is the most important consideration, is that the cost of taxes ripples throughout the economy and makes life more expensive for everyone, but especially for the poor. That is not even to mention the untold millions which is squandered by government through inefficiency, bad management, and corruption.

Economic freedom – the ability of all South Africans to keep and control what they earn – means lower and unassuming taxes. This ensures that our economy is people-centric, rather than the current state-centric mindset that dominates our discourse.

The obsession with income inequality and the notion that ‘the rich’ are maliciously repressing poor South Africans shifts attention away from the real reason why millions remain poor – a growthless economic environment where productivity and entrepreneurship might be encouraged rhetorically, but is not encouraged realistically. The proven and surest path to increased economic prosperity is through less government intervention – not more.

Authors Jasson Urbach is director and Martin van Staden is legal researcher at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the authors. The views expressed in the article are the authors’ and are not necessarily shared by the members of the Free Market Foundation.

 

 

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