SA’s deadweight burden

In the column, “No cash for stimulus, but words will help” (September 3), there is little explanation for the disagreement with the Davis tax committee’s findings on a wealth tax and immovable property

The committee’s report explains: “Hence a land tax may not deter production or distort the market mechanism or otherwise create a deadweight loss.” Our dead-weight losses are the reason why there is no room for stimuli.

The committee did not reveal the quantum of SA’s deadweight burden, but it is a standard international measurement. In his submission to the committee, Prof Nicolaus Tideman calculated that SA is likely to incur a R0.8-trillion loss of GDP in 2018-19. The ratio of taxes to loss of GDP is therefore 1:0.8.

Imagine that prior to the introduction of income taxes and VAT in 1914 a pair of shoes cost R10. In 1914 terms the same shoes will cost about R12.80 in 2018, where the tax rate is 28% of GDP. If SA had continued with its land tax regime the shoes would still cost R10 by the same measure.

Bryan Kavanagh, a valuer who worked in the Australian Taxation Office and Commonwealth Bank of Australia, determined the ratio of taxes to loss of GDP to be 1:2.34. He took Australia’s 5.53% peak annual GDP growth from 1972 to 2006 and spread that growth across the 34 years, assuming state capture of half the land and no land bubble-generated recessions.

The 5.3% was deemed to be a conservative economic performance once tax-induced recessions and non-growth periods were eliminated, and after adjusting for inflation.

So if tomorrow the president proclaimed that land taxes will replace income taxes and VAT, would that be sufficient stimulus?

Peter Meakin Claremont