Laws, regulations and taxes that discourage wealth creation must be repealed

Judge Dennis Davis recently ignited the debate around the possible strengthening of tax audits on high-net-worth taxpayers, in an article on BusinessLIVE.

Davis writes that his "concern is that, in a country with levels of inequality as high as those of SA, it is unconscionable that millions pay their fair share of tax — by way of pay-as-you-earn tax and/or VAT — but some who own multiple homes and fancy motor cars consider it their divine right not to pay their legal dues to the SA Revenue Service".

It may very well be the case that individuals actively evade paying their taxes, but it is not clear that a blanket audit approach on all high-net-worth individuals is the best route. We should ask ourselves what will result in a greater improvement in the long run, audits on all, or examining what is driving people to not pay their taxes in the first place?

There is a broader question surrounding the presumption of a social contract between the citizen and the state. When service delivery levels plummet and corruption is widespread — even during a global pandemic — should it simply be expected that citizens should continue paying taxes without at least asking some questions? Given government's own seeming obsession with repeatedly bailing out vanity projects such as SAA, is the moral obligation on citizens not even greater to reconsider what their taxes are used for, and perhaps whether their desire to care for people around them who might be less well-off will be better actualised through community groups, corporate investment schemes and nongovernmental organisations?

Davis touches on his concern regarding the high level of inequality. In SA we tend to presume a high level of inequality indicates that something is fundamentally wrong — but we do not pause to consider the different causes of inequality, and whether it arises as a result of free interactions between people and businesses, or either the active taking of wealth by some or a policy regime that makes it difficult for the non-politically connected to create wealth for themselves. Indeed, the vital distinction between wealth that is created and wealth that is taken through force or fraud must be borne in mind.

With every yearly release of Oxfam's inequality report, our focus becomes ever more narrowed on the "issue" of inequality and we lose sight of the most pressing problem in SA, that of unemployment and grinding poverty. Living in poverty and hardship was the lot for the majority of humanity for thousands of years. With increased specialisation and industrialisation, trading in all manner of goods and services, the ability to earn a living by working for only eight hours on average — not 16 hours or more — and the ability to save and invest, people could for the first time lift themselves out of drudgery. With the growth of free markets, the rule of law and respect for property rights, wealth creation became more widespread.

We need an environment where success and wealth creation is encouraged and aided at every opportunity, not demonised. At present our collective imagination — and the policies that flow therefrom — are premised on redistribution, causing us to lose sight of eliminating those barriers that inhibit the creation of millions of wealth pies rather than merely dividing one, shrinking pie between everyone. If we see all the wealth in SA as one fixed amount we will obsess over what the state (a misguided, incompetent state at that) should do with this ever-dwindling pie. There is no progress, and no radical growth, down this route.

In those countries with little economic freedom it is true that the amount of overall wealth is fixed — it simply changes hands between those with the necessary political connections. There is little to no scope for others to build businesses, invest and create more wealth. As the state grows, the economy becomes more regulated and the only way to "win" is by greasing the palms of politicians, bigger players will rig the game and there won't be competition, growth or positive transformation. As SA slides down the economic freedom rankings (we ranked 90th out of 162 countries on the Fraser Institute's 2020 Economic Freedom of the World report, from 58th in 2000), the incentives to control remaining wealth (and wealth-generating mechanisms) become higher and more cut-throat, and more corruption will result.

A broader point to keep in mind is the difference in moral considerations between tax avoidance and tax evasion. What about SA's society and investment environments may give high-net-worth individuals pause, while they consider that it might be better for themselves, their families and their investments to shift their tax responsibilities to other countries? Could it be that the raft of anti-freedom and anti-growth policies here — with the proposed amendment of section 25 of the constitution to allow for expropriation without compensation the most concerning of all — serve to encourage tax avoidance and tax migration? It could well result in more tax revenue collection to conduct audits, but would those distract from the most important regulatory matters suffocating the economy as a whole?

After the devastation caused by Covid-19 and government lockdowns and regulations, our most urgent priority should be to repeal those laws, regulations and taxes that discourage and inhibit wealth creation — from the smallest level to the very biggest. The drive to extract as much tax collection as possible might well result in an environment where fewer businesses and individuals are even capable of paying a meaningful amount of tax. Without substantial capital investment and formation, no businesses (of whatever size) are going to grow.

From the broader point of view, productivity is vitally important if South Africans are to get the economy humming again; this is why it is so important to have the discussion as to whether the SA regulatory environment actually punishes saving and investment.

This article was first published on BusinessDay on 27 January 2021

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