All of a country's taxes, whether on personal income, sales, property, corporate profits, international trade or whatever, are eventually paid by its people. If the government says it is going to spend R100 million on a project, it means that the government is going to take that full amount from taxpayers to spend on the project. Governments are inclined to forget this and we often hear politicians and officials saying, "The government has contributed R100 million to the project, now what contribution is the private sector going to make?" Perhaps governments would act more responsibly if they internalised the fact that every single cent they spend comes, in the final analysis, from the people who make up the private sector.
Salaries and perks of all politicians, from the State President to local authority councillors, as well as the salaries of government officials, at all levels of government, are paid from taxes on the private sector. The taxes on government official salaries amount to nothing more than a book entry, transferring funds from one government bank account to another.
Given that they carry the full expense of the state, private taxpayers are entitled to ask two very valid questions. Are their taxes being efficiently spent? And is there not a better way of doing what the state has taken upon itself to do? Allowing private suppliers to offer alternatives to government services can easily test the efficiency of government spending. There is accumulating evidence that the free market provides any service more efficiently than the state and this allows the state to steadily withdraw from all fields of activity that are adequately covered by private alternatives. And if the market doesn't provide a particular service it invariably means that the service costs more than consumers are willing to pay for it. It also means that the freer the market the more everyone is likely to get what he or she really wants at a price they find acceptable.
In addition, every function previously performed by civil society that has been taken over by the state involves a move from voluntary action to coercion - a reduction of freedom. Tax is equivalent to time spent working for someone else rather than for yourself. At best there will be some agreement between you and the government on how to use your hard-earned money but much of it will simply go towards paying for services that you would not have paid for voluntarily. At worst, taxes could actually be used for purposes that are opposed to your own interests.
One way of looking at the tax burden is to calculate 'tax freedom day' - the day in each year when enough GDP has been earned to meet the country's tax bills and average taxpayers start 'working for themselves'. Tax freedom day is a rough measure of freedom of choice and future economic welfare. It is calculated by multiplying the proportion of GDP (at market prices) taken for general government revenue by the number of days in a year and then adding a day to the result. This year South Africa's tax freedom day falls on Monday, April 22.
As can be seen in the graph below, taxes as a proportion of the country's earnings are increasing. On the plus side we can see that government expenditure is declining as a percentage of GDP. Government is growing relative to civil society but is arguably becoming more responsible because it is borrowing and spending less. What should our response to this be? If we value our freedom and economic growth we ought to pressure the state to keep reducing spending and also reduce taxes. If we want our economy to grow at 6% plus per annum, which it needs to do to rapidly reduce unemployment, taxes and spending must be reduced to below 25% of GDP, a similar reduction to that achieved between 1994 and 2000. And then we could have tax freedom day on March 31.
Statistician at a major bank
For more details contact Garth Zietsman on 083 309 3572 / (011) 636 5846
or Eustace Davie, Free Market Foundation, (011) 884 0270
FMF Article of the Week\22 April 2002