Mpiyakhe Dhlamini is a libertarian, writer, programmer, and contributing author to the Free Market Foundation.
The views expressed in the article are the author's and not necessarily shared by the members of the Foundation.
This article may be republished without prior consent but with acknowledgement to the author.
The FMF is an independent, non-profit, public benefit organisation, created in 1975 by pro-free market business and civil society national bodies to work for
a non-racial, free and prosperous South Africa.
As a policy organisation it promotes sound economic policies and the principles
of good law. As a think tank it seeks and puts forward solutions to some of the country's most pressing problems: unemployment, poverty, growth, education, health care, electricity supply, and more. The FMF was instrumental in the post-apartheid negotiations and directly influenced the Constitutional Commission to include the property
rights clause: a critical cornerstone of economic freedom.
+27 11 884 0270
PO Box 4056, Cramerview 2060
This article was first published on BizNews.com on
5 December 2022
The hypocrisy of dividend and personal income taxes
Taxes are never pleasant, but they can do a lot of good if used in the right way, such as providing access to education and healthcare for the poor through vouchers. Taxes can also do a lot of harm by dissuading savings and investments, which ultimately leads to less jobs and a reduced ability for people to take care of their own needs. This is especially the case when it comes to dividend withholding tax and personal income tax.
The dividend withholding tax is an instance of double taxation. As a shareholder of a company, the profits of the company will go towards one of two things: increasing the equity you have in the company through increasing the assets of the company or reducing the debt of the company, or it will be paid to you in the form of dividends. But before the profits are used to increase your equity or pay you dividends, governments will tax these profits at a rate of 27%.
The incomprehensible thing is why after levying this tax, would the government levy an additional 20% on the dividends paid from these same profits to the shareholder? Not only is this unfair, it also incentivises companies to prefer reinvesting profits even if no suitable investments can be found easily. This encourages waste whereas the money could have been used more effectively by the shareholder.
Perhaps the problem is that these shareholders are seen as being wealthy individuals who can afford to pay an additional 20% on profits that have already been taxed? If that’s the case, then shareholders should be able to claim back from SARS any dividend withholding taxes paid for a given tax year if the total value of the dividends or total income of the shareholder is below a certain threshold.
This double-standard also discourages savings by reducing the real returns from savings. This is especially the case in a time of high inflation. If the dividend yield (percentage of the price paid for the stock returned to shareholder as dividend) is 10%, the dividend withholding tax reduces it to 8%, with annual inflation currently at around 7%, the real return for the shareholder would then be a measly 1%. Many of these shareholders are pensioners who rely on investment income for their livelihoods.
There’s another tax double-standard, and perhaps this double-standard is more egregious because it affects many more people. I am of course referring to the different ways in which Corporate and Personal Income taxes are treated. Corporations pay income tax on their profits, meaning their income after expenses have been accounted for. While individuals pay income taxes on their gross income regardless of expenses.
This means that no matter how much of your income is needed to provide for your living expenses and those of your dependents, the government will still demand their taxes from you. Corporations are charged taxes only on the income remaining after they have paid their expenses. Of course, the different handling of corporate vs personal income tax means that individuals have less available disposable income for savings and ultimately for investing, including buying shares in corporations. Corporations have the edge over individuals in the investing game and this must surely explain some of the inequality that everyone is so concerned about.
Of course, it’s true that corporations are ultimately owned by individuals, but if you are a major shareholder in a corporation, then you can simply choose to do your investing via the corporation. This option is not available to most people who rely on a job as their main source of income. The company that the person works for is obligated by law to deduct from this person’s income the taxes due to the government regardless of the costs the individual has. Individuals should at least be allowed to deduct living costs (costs of food, education, healthcare, shelter, transport and communications) from their taxable income.
The tax hypocrisy of the dividend withholding tax and the personal income tax reveals that the concerns over inequality in society are so much hot air. The dividend withholding tax reduces the income an individual earns from their investments and is levied on profits that have already been taxed through the corporate income tax. The personal income tax reduces the amount available to save and invest in the first place, both taxes have the net effect of making ordinary and especially small investors less well-off relative to large investors. It makes the wealth ladder that much harder to climb for ordinary people.