Tax Freedom Day

On Sunday, May 10, the people of South Africa began at last to work for themselves. Until then, from January 1 through May 9, their labour went exclusively towards paying government’s costs for a year. May 10 was South Africa’s Tax Freedom Day.

Tax Freedom Day is a measure of how much of the GDP is needed to cover the cost of government. To establish what proportion of the year’s labour goes towards paying for government, general government revenue is divided by gross domestic product at market prices. The answer is used to determine how many days it will take, from January 1, to pay the country’s tax bill. The day after marks Tax Freedom Day: the date from which the average taxpayer is no longer working for the state and can begin to enjoy the fruits of his or her labour.

Imagine the economy is grain. The government takes a portion and the people are allowed to keep the rest. Government doesn’t use the grain as seed, and what it doesn’t eat itself – and governments always eat very generously – is handed out to those whom government thinks are hungriest, or to feast supporters. The people, the grain growers, eat some of the grain that they have left, but they also plant some to grow next year’s crop. Naturally, the more they were left by government, the more they will have to eat or plant.

Now imagine two countries. One grows 12 sacks of grain and the second 24 sacks. The people of both countries need three sacks in order to survive, and four to thrive.

If the government of the first country takes three sacks (a quarter of the country’s produce) the people of that country, if they are thrifty and eat only three sacks, will have six sacks left to plant for next year’s crop. If the government of the second country takes eight sacks (a third of that country’s produce) and the people eat four sacks, the people will be left with 12 sacks to plant. The second country, which started with twice as much grain, will still have twice as much next year because it replanted twice as much.

Example 1
Country 1Country 2
1224Sacks grown year 1
38Sacks taken by government
34Sacks eaten
612Sacks available for planting year 2
Country 2 remains twice as wealthy as Country 1

This clearly shows that in a country with more grain a government can afford to take a larger portion of it (a third versus a quarter) and the people can eat more (four sacks versus three) without immediately affecting growth. If less seed is planted, however, fewer people are employed which means there will be unemployment.

If the government of the second country took a quarter of the grain (six sacks) instead of a third (eight sacks), there would be two additional sacks to plant. If it plants 14 versus 12 sacks, the second country would be more than twice as wealthy as the first country the following year.

Example 2
Country 1Country 2
1224Sacks grown year 1
36Sacks taken by government
34Sacks eaten
614Sacks available for planting year 2
Country 2 is more than twice as wealthy as Country 1

Of course, if the government of the first country took only two sacks (a sixth of the grain), that country would have seven sacks to plant the following year and the cycle of growth would begin.

Example 3
Country 1Country 2
1224Sacks grown year 1
26Sacks taken by government
34Sacks eaten
714Sacks available for planting year 2
Country 1 begins to grow

It thus becomes obvious that growth rates are determined by how much more seed is planted. Poor countries cannot afford to deplete their stock of seed in order to feed themselves more generously or to cover increasing costs of governments.

More money must be put back into an economy each year if it is to grow. In other words, governments of poorer countries must endeavour to take a smaller proportion of GDP than those of rich countries.

Tax Freedom Day this year is two days earlier than last year. This is the first reduction after a long trend of ever later dates. In the last two years, Tax Freedom Day fell somewhat later than the government intended because in 2007 and 2008 the government had an unplanned windfall in tax revenues. That didn’t happen again this year. Discounting those two windfalls, the trend is still unmistakeably toward government taking ever more of the grain it should be leaving behind for replanting. Currently the size of South Africa’s government is average for an economy of its size. It needs to get better though so that we can employ more people to plant more seed and reap more grain and watch the economy grow and be able to start working for ourselves a lot sooner.

Author: Garth Zietsman is a statistical consultant. 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.

FMF Feature Article / 12 May 2009
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