Feature Article: Enslaved? Tax Freedom Day four days later than in 2012

One fundamental aspect of freedom is to have the reward of one’s own industry.  Taxes, however, deny us a substantial part of this reward.  They consume quite a bit of our earnings and force us, no matter who we are, to “work” for government a large part of our time. 

Taxes are not a voluntary contribution paid out of surplus earnings.  No, we are compelled to pay them before we can spend our money on anything else.  Only out of what is left can we buy necessities like food, clothing, transport and shelter, and, if we are fortunate, any other thing that makes our lives broader and more abundant. 

But, Thursday, 9 May, is Tax Freedom Day. The day we, the people of South Africa, start to work for ourselves.  From 1 January until 8 May, all the incomes earned by the average South African make up the amount of money needed to pay for one year of government. 

Tax Freedom Day 2013 is 4 days later than in 2012, and 7 days later than in 2011. And, be warned, it is likely to be even later next year because government spending, the deficit and government debt continues to increase.  The only way government can find the money to fund its spending is to increase the taxes we pay.

Apart from us losing a principal aspect of freedom by having our hard-earned incomes reduced by ever-higher taxes, why should we concern ourselves about the level of government revenue and spending? Because virtually every measure of welfare of a country’s people depends crucially on the overall prosperity of that country’s people. 

Studies in the US and Europe consistently show that each 10% increase in total government spending as a percentage of GDP reduces the growth rate by around 0.8% and increases the unemployment rate by around 3.6%.  Other studies find that reducing government consumption by 1% immediately increases investment by 0.5% - increasing to 2.7% after 5 years.  Estimates of optimum total government spending for maximal productivity place it at 20-23% of GDP.

Why do high government expenditure and tax rates have this effect?  In a nutshell, high marginal tax rates reduce the incentives for entrepreneurs. Why should they risk their capital or sacrifice their time and energy to earn higher incomes? High tax rates interfere with the ability of individuals to pursue their goals because they result in less disposable incomes. Less disposable income means less saving; less saving means less capital formation; less capital formation means lower labour productivity, and lower labour productivity means lower real wages.

Governments that consume more than 23% of GDP are a luxury countries can’t afford. South Africa’s government spending is at least 11.5% above this level.  Judged by international standards, our government spending is very high - in the worst 17% of countries in the world for our level of development.  Even worse, our government spending is growing at such an alarming pace that it is using our taxes more and more for consumption spending rather than for core functions and capital projects. 

If government reduced  its spending (and tax take) to optimum levels – about a third less than it is now –unemployment would reduce by 4.25% (205,539 jobs), the investment rate increase by 32%, and the growth rate by around 0.95% -  and perhaps even reduce the time it takes to double per capita incomes from 36 to 25 years.  These are huge benefits - or huge losses if government doesn’t do what is needed. One of the greatest things government can do for the South African people is to economise. 

Government should focus on those core functions that enable and support prosperity. Functions that ensure that the rule of law is respected and enforced, that the country is kept safe from foreign aggression and its seas free from foreign plunder, that the currency remains sound, and that there are no barriers to trade or entry into the marketplace.  From the point of view of giving South Africa the best chance of becoming prosperous anything else government currently does is excessive. Our economy will be more buoyant, entrepreneurs more active and competitive, more people employed, everyone more prosperous, the earlier Tax Freedom Day occurs in the year.

Source: This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.


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