Tax has been a part of human history for millennia. There are records of farmers in ancient Egypt giving up a portion of their crops and peasants having to provide some of their labour freely to the Pharaoh. During the following centuries, taxation became commonplace in global societies, yet over time rulers learnt that there were limits to people’s willingness to comply. The French revolution was fueled by a revolt against onerous taxes and the British tax policy towards colonies helped to initiate the American Revolution and the formation of the United States. In 1789, Benjamin Franklin wrote “in this world nothing can be said to be certain, except death and taxes.”
Modern tax systems have changed dramatically since ancient times, but there are no international standards. Tax burdens and the complexity of tax codes vary widely across countries. In Brazil, taxes are high and complex; in Singapore, they are low and the system is simple. Many states (including South Africa) now offer electronic systems for the filing of tax returns and the payment of taxes. Modern technology allows governments to be more efficient, effective and transparent, but it is still up to the lawmakers to create a stable, predictable and effective tax environment.
Within Africa, Mauritius offers the best tax environment. This has enabled a stable and diversified economy to grow. The tax code in the Seychelles, Botswana and South Africa has also allowed for some economic success, but there is still much room for improvement. Lower taxes are an obvious incentive for businesses, but a simplified tax code encourages investment too by reducing administrative costs, increasing compliance, and creating greater transparency. Unfortunately, South Africa is currently moving in the wrong direction by increasing government spending, raising taxes and inadvertently adding layers of bureaucracy.
South Africa’s GDP per capita is lagging behind the Seychelles, Mauritius, and Botswana, and the recent changes to our tax system are not going to help us catch up. It takes longer to comply with the South African tax code than it does in the other three countries, according to a PWC 2018 report. The government's decision to increase VAT to 15%, increase the fuel levies by R0.52, and introduce a sugar tax is a move in the wrong direction. The government is increasing both the level and complexity of taxation when it should be striving to do the opposite.
The expansion of government spending under the rule of Zuma has increased government debt to more than 50% of GDP, putting pressure on the state to find other sources of revenue. Increasing VAT and fuel levies is an attractive option for politicians because it taxes all South Africans and is capable of raising enormous amounts of revenue. The 1% increase is expected to cost South Africans R22.9 billion. Although the national budget announced attempts to cut state costs and lower the budget deficit, overall taxes are still increasing by more than R10 billion. This will not lower the deficit. As the late economist Milton Friedman pointed out:
“You cannot reduce the deficit by raising taxes. Increasing taxes only results in more spending, leaving the deficit at the highest level conceivably accepted by the public. Political Rule Number One is government spends what government receives plus as much more as it can get away with.”
What the taxes will achieve is more poverty. A 15% VAT will increase the cost of living for all South Africans. Increased fuel levies will push up transportation costs. Low-income households in South Africa spend a larger proportion of their income on transport than the middle class and rich. Transport costs (to and from work or city centres) have been exacerbated by the separation of townships under apartheid planning. A sugar tax is also regressive, food and beverages make up a relatively larger proportion of expenditure in poor than in rich households.
The tax changes deliver a triple-blow to low-income households and worsen income inequality in a country where this is already a crippling problem. The government should be encouraging a stable economic environment rather than trying to expand government spending, taxes, and debt to enable South Africa to catch up to the growth of Africa’s star performers. History has shown that people undergoing hardship will not be willing to give an ever-increasing share of earnings to a greedy state, so, let us learn from history and our neighbours and create a simplified tax system that betters our society and economy.Luke Muller is an independent economist.