Business Day column: Delinquent state spending redistributes wealth from the poor to the rich

GOVERNMENT delinquency is "at the taxpayer’s expense" and is one of the most misleading and destructive of myths. This column has argued that government waste does not cost taxpayers one cent. Government waste, and much of what is spent legitimately, amounts to the redistribution of wealth from poor to rich. I have been asked to explain myself.

The established view, strengthened by low-income voters lulled into complacency by the illusion of fat-cat taxpayers footing the bill, is so entrenched that I am unaware of it being questioned.

We are bombarded with reports of everything reprehensible being "at taxpayers’ expense". The Dewani family, for instance, was living during the trial "at taxpayers’ expense". The "obsession with growth and expansion" of South African Airways is "at taxpayers’ expense". The Democratic Alliance accuses the African National Congress (ANC) of "electioneering at taxpayers’ expense". MPs went on a "spending spree … at taxpayers’ expense". Richard Branson "banks millions at the taxpayer’s expense". The ANC paints Gauteng "green, black and gold at taxpayers’ expense".

Prescription drugs in prisons generate "huge profits for pharmaceutical companies at taxpayers’ expense". President Jacob Zuma costs "the taxpayer" a billion rand. MECs’ cars "may have been acquired at the taxpayers’ expense". MPs want "flights for 10 years … at taxpayers’ expense". The "after-market parts industry (is) curtailed at taxpayers’ expense". And so on.

Taxes, however, are fixed at the start of each budget year. Every ad hoc expense that attracts criticism is a reallocation of funds from what was originally intended. If officials party instead of providing welfare, they do not collect more from taxpayers; they divert every misspent cent from destitute people. That is simple arithmetic, not ideology.

Waste, patronage, nepotism, favouritism, racism and corruption occur at the expense of intended beneficiaries. After deducting government debt from the budget, more than half of what remains is earmarked for education, healthcare, welfare, development and housing. The rest is for infrastructure, security, public administration and "other", all also meant to benefit predominantly the poor. If 80% of the former and 60% of the latter are for "the poor", more than 75c of every reallocated rand is at their expense.

Taxpayer mythology also presumes most revenue to be from "the rich". High progressive tax rates mean that rich people pay, or are expected to pay, more of what they earn. Because there are few rich people, and they are good at avoidance, they contribute only a small proportion of total revenue. Free Market Foundation calculations presented to the Davis Tax Committee showed that, if the highest marginal tax rates are doubled, not much more would be collected than if everyone pays a simple, flat, low tax rate.

Nearly 70% of tax is from personal tax, VAT and customs and excise. Most of that comes from middle-and low-income earners.

We have one of the world’s highest company tax rates, but companies contribute only 18% of total revenue. But, who actually pays company tax? All taxes are ultimately paid by people. If company tax is abolished, as it should be, who would be enriched? As corporate rates of return remain constant regardless of tax rates, company tax is not primarily at the expense of owners. Managers, workers and creditors are paid at "market rates", which suggests that company tax is not at their expense. That leaves consumers. Competition forces companies to translate savings, regardless of their source, into lower prices. Company tax should therefore, like VAT, be regarded as consumer tax. Most consumers are poor. Finally, there are fuel and "other" taxes (12%). Most taxes, such as "sin" tax, are called "regressive" because they affect the poor disproportionately.

In short, most tax is extracted from the poor. Once collected, delinquent spending redistributes wealth from the poor to the rich.

• Louw is executive director of the Free Market Foundation.
This article was first published in Business Day on 20 May 2015
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