The state is consuming SA's economic growth

Today, Friday May 21, is Tax Freedom Day, when South Africans stop working for the state and start working for themselves. This year it falls two days later than last year, in which it occurred one day later than in 2019. This is alarming because it means the economy contracted.

While spending and wages also contracted, profits did so to an even greater extent. Therefore, taxes ought to have contracted more than the economy and Tax Freedom Day should have been earlier.

To put this into clearer perspective, in 1994 it took 101 days to pay for the government before South Africans could start earning for themselves. It now takes 141 days — nearly six weeks longer — and the state has helped itself to more than half the economic growth since 1994. The long-term trend is towards increasingly later Tax Freedom Days and, considering the high level of borrowing, this trend is not likely to stop.

Tax Freedom Day is calculated by dividing general government revenue by GDP at market prices, then multiplying the result by the number of days in a year, and finally adding a day.

SA has the 12th highest income tax burden, the ninth highest company income tax burden, the 77th highest indirect tax burden (before the increase), and the 14th highest non-resource tax burden worldwide.

Furthermore, general government revenue does not include the revenue of public enterprises such as Eskom and Telkom. Five years ago, there were no fewer than 717 state-owned enterprises (SOEs) with total assets of R1-trillion or 27% of GDP, and government investment amounted to 30% of total investment.

If we consider this as government revenue, Tax Freedom Day would be a month later, that is total government revenue is really some 46.6% of the entire economy. This is exceptionally high by international standards. For our level of economic development it is almost the highest in the world.

Despite the high tax burden, the government produces little to show for it. Our education system is dismal — high numbers of pupils per teacher, low graduation rates and low levels of realised academic skills (even compared to other developing countries); and we produce or retain half the global average of doctors per capita.

The crime rate is high and most serious crimes go unsolved. Developed countries spend 3.5% of GDP on infrastructure and developing countries closer to 5% (despite much lower tax burdens), while SA manages a measly 3.2% — and much of that is pillaged via corruption.

You may ask why high taxes are a concern more generally. One reason is that governments tend to be less efficient than private enterprise and our government performs badly by the standards of government generally. In short, tilting the economy towards the government is a waste of resources and tends to slow growth. Second, corruption depends on funds going through the government. This massive level of theft and abuse would be curtailed if the government had less control over the economy and less funding.

Finally, harmful policies — in the sense of preventing growth, innovation and employment or causing social strife — are extremely costly. SA governments, in the past and now, seem to come up with more than their fair share of bad policies and are often infamous for them. 

You ought to be opposed to large government and ever later Tax Freedom Days, and it seems many sectors of society are becoming more supportive of some form of tax revolt. Many people just emigrate, a disproportionate number of them former big tax contributors.

A survey in 2020 revealed that most businesses are open to the notion of both legal tax revolts (more than 75%) and illegal tax revolts (more than 60%).

This article was first published on BusinessDay on 21 May 2021.

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