Taxing regulations

DEAR SIR — In the past weeks we have witnessed what is essentially a popular revolt against the abuse of power by the US Internal Revenue Service (IRS). We have also witnessed Apple CEO Tim Cook being summoned to a US congressional hearing on offshore profit shifting, and we have seen Google, Starbucks, Amazon.com and McDonald’s come under fire for their “aggressive (but legal) tax schemes”.

We saw Ireland having to defend its tax code and we saw the agenda of a European Union summit in Brussels hijacked by concerns on international taxation of multinational companies.

What is emerging is a realisation that tax codes are generally bloated and overly complex. And because they are so convoluted in their objectives and edicts, they end up being misguided and impossible to harmonise across jurisdictions in a globalising economy.

We need not delve too deep to find perverse tax codes at home. In a country such as ours, with its poverty and joblessness, we should be embracing every activity that mobilises resources to add value; employs people and creates wealth. We should not tax such activities for the sake of taxing them.

It is axiomatic that if you want more of something you should reduce tax on it, and vice versa. But why tax “value add”? Value-added tax (VAT) was introduced to simplify the tax administration of what we had before it, sales tax. Sales taxes move the tax burden from production towards consumption. VAT, on the other hand, is a regressive tax on business activity itself. It does not ask successful business to share its profits, it imposes a burden on all value-adding activity. Most perversely, it amounts to a tax on labour.

As for the notion of VAT being administratively efficient, that has been substantially weakened by the South African Revenue Service’s response to “widespread fraud”, which erects barriers to new entrants by making it difficult to establish a business with a VAT number from the start of operations. Paul Dent Lynnwood