South Africans will stop working for the government and start working for themselves later this year than ever before. All taxes, regardless of what they are called, are paid directly or indirectly by ordinary South Africans. Tax Freedom Day (TFD) is the day of the year on which people in effect stop working to pay tax and start earning income for themselves and their families.
TFD is calculated annually for the FMF by statistician, Garth Zietsman. It measures the extent to which tax consumes the nation’s wealth. Assuming all income goes to government until all tax has been paid, what people earn for the first 141 days of the year goes to government. Governments have no money other than what they tax from subjects. Even what they borrow is eventually repaid with taxes.
This year’s Tax Freedom Day (22 May 2014) is 13 days later than last year (9 May 2013) and, according to Zietsman, “is likely to be even later next year because government spending, the deficit and government debt is still increasing. They must be funded by future taxes.”
South Africa’s government expenditure as a percentage of all the wealth people produce (GDP) has grown substantially. TFD in 1994 was 12 April, a full 40 days earlier than this year. This means that taxpayers are spending 10.7% more of the year working for the government. According to the 2014-15 Budget, the tax burden will be 38.6% of GDP. In effect, South Africans work for the government for 38.6% of the year and only thereafter for themselves. You can think of it also as, out of every week, you spend two days working for government before you can start earning for yourself.
Examples of 2014 TFDs for other countries are: Australia 10 April, United States 21 April, Estonia 24 April, New Zealand 3 May, Lithuania 8 May and United Kingdom 28 May. Our tax levels have clearly overtaken those of some of the most highly developed and highly taxed countries in the world, which is a most disturbing development, especially in a world in which developing countries are trying to cut taxes.
When government absorbs an increased percentage of economic resources, it limits the economy’s ability to grow. Governments often speak as if they conjure wealth out of thin air, as if there are free lunches. They promise grants, incentives, subsidies, concessions and spending as if they produce wealth, whereas they are, with rare exceptions, net consumers of wealth. There is no such thing as “government money” with which to “stimulate” an economy. Every cent governments spend is money taken from individuals by taxes or inflation. Even “company tax” is taken from the people who would otherwise receive it: employees, managers, investors, consumers, lenders and the like.
What governments give is necessarily less than what they take, and government spending is almost always less efficient than private spending. The problem with government spending, especially grants and subsidies, is that the money can be taken from only net producers of wealth for transfer to net consumers of wealth, thus making everyone poorer on average.
Increased taxes and deficits (which require more tax to pay increased government debt), as a proportion of GDP, drain the economy. For reasons explained in a large body of scholarly literature, if the GDP grows slowly, a prudent government cuts taxes and debt accordingly.
A US Joint Economic Committee report explained: "Like taxes, borrowing will crowd out private investment and it will also lead to higher future taxes. Thus, even if the productivity of government expenditures did not decline, the disincentive effects of taxation and borrowing as resources are shifted from the private sector to the public sector, would exert a negative impact on economic growth."
A National Tax Journal article points out that the "appropriate size and role of government depend on how costly it is to transfer funds from taxpayers to the government. That cost includes more than the administrative cost of the government and the time spent by taxpayers to keep records and complete forms. It also includes the loss of real income that occurs because taxes distort economic incentives. Recent econometric work implies that the deadweight burden caused by tax increases may exceed one dollar for every dollar of additional tax revenue that is raised. Such estimates imply that the true economic cost of each extra dollar of government spending is more than two dollars. That is, individuals lose the equivalent of more than two dollars of additional consumption for every extra dollar of government spending.”
The International Monetary Fund (IMF) agreed: "This tax induced distortion in economic behaviour results in a net efficiency loss to the whole economy, commonly referred to as the 'excess burden of taxation,' even if the government engages in exactly the same activities and with the same degree of efficiency as the private sector with the tax revenue so raised."
In other words, for every rand taxed, South Africans may be two rand poorer, and working for the government instead of themselves for two thirds of their working lives.
Author: Leon Louw is the Executive Director of the Free Market Foundation. 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.