South Africa: The Effect Of Taxes On The Economy

Last Updated: 3 June 2013
Article by Eric Milner

The Financial Mail reported in its January 25 edition that SARS is considering changing the basis of customs valuations from the present free-on-board (FOB) principle to a valuation based upon cost, insurance and freight (CIF). The purpose of the change is to increase customs collections, and speculation is that an announcement might be made in the Budget speech in February.

The reason that I raise this issue is not to comment on customs duties, which is really not an area of my expertise at all, but rather to point out the misguided ideology with which the government approaches taxes and, in particular, the effect that taxes have on the economy.

The effect of raising customs duties is to raise the price of goods imported, not just by the amount of the additional customs levied but by the mark-up placed upon the goods by the wholesaler and retailer. In fact, a whole host of costs go up. Turn-over-based rental paid to a landlord will increase, since a higher price is being charged, as does commission paid on credit card sales, as does VAT on the final sale—to mention but a few costs that will increase. The main concern is ultimately the knock-on effect that such increases will have on inflation.

This is not the only example of the government's acting with complete disregard to inflation. The reaction to the electricity crisis of 2008 was not only to raise electricity prices by 26% a year but the government imposed a new tax on electricity usage. Municipalities not wishing to miss the opportunity to sock it to their constituents imposed a whole host of new costs on electricity as well.

Ratepayers in Johannesburg now pay the following charges in addition to the cost of the electricity supplied: a network charge, a service charge, and a demand side levy. To round off the complete mugging of the ratepayer, VAT is then levied on the total.

The Statistics South Africa CPI report released for December 2012 indicates the cavalier approach adopted by government towards inflation. CPI for 2012 comes in at 5.6%, and the annual inflation rate for December comes in at 5.7%. By far the highest increase related to administered prices (prices controlled by the government, at least to some extent), which came in at a whopping 9.1%.

Essentially, any product or service controlled by the government, at whatever level, has been escalating in price with very little regard to inflation or the pocket of the taxpayer, ratepayer or consumer.

To some extent South African has been extremely lucky, evidenced by its perfect, counter-cyclical timing in building white-elephant World Cup stadiums as well as all the other capital projects rushed through to completion, ostensibly for the World Cup, such as the Gautrain and improved highways. If white elephants were to be built, 2008 to 2010 was the perfect time to build them if you wanted to administer an economic stimulus.

Similarly, with inflation we have been extremely lucky, in that the economic meltdown of 2008 has resulted in a low-inflation environment, despite every effort of the powers that be to increase prices well above inflation.

The craziest government plan that I have come across is the parking tax levied in Parkhurst, soon to be rolled out across the rest of the city. The city has entered into a contract under which 75% of the tax raised from parking on city roads will be paid to a private company collecting the tax. I have yet to hear a proper explanation for this arrangement. The two arguments advanced so far do not bear up to examination. The first justification is the extra revenue collected. Any tax consuming 75% of the tax collected in the cost of collection cannot be right. The second points to job creation. Unfortunately, the salaries paid to employees collecting R4 an hour for parking verges on the exploitative, and labour action is already threatened. The only people I can imagine likely to obtain any benefit out of this arrangement are the executives of the company that won the tender to collect the tax.

Which brings me to Adam Smith, who wrote The Wealth of Nations in 1776. One of his guiding principles on tax went like this:

Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

He goes on to list four ways in which a tax may 'either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury': first, the cost of raising the tax may be prohibitive; secondly, the tax may hinder business and job creation; thirdly, penalties imposed for noncompliance may wreak ruin on the population; and, finally (and here I have to quote directly from the text, owing to its elegance and plain darn attractiveness):

[B]y subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it.

I am ready to believe that Adam Smith had a Nostradamus-like foresight in envisaging the rise of SARS.

In my view, business and most middle-class families have been able to survive the government price-onslaught only because inflation has been low and interest rates are at the lowest they have been in decades.

Interest rates in South Africa have nevertheless been known to move in huge jumps (who can for-get the 25% rate in 1999?). The government needs to be doing its level best to guard against any up-tick in inflation, which means, in turn, not taking the opportunity to fleece the taxpayer with new taxes having a knock-on effect on inflation, particularly with the rand at its worst level in several years.

To paraphrase Sir Humphrey from the British TV comedy Yes Minister: If you are going to do this damn silly thing, don't do it in this damn silly way!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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