Taxing citizens for state overspending will not aid growth

South Africans will soon learn how much more of their disposable incomes and wealth will be extracted to sustain the credit rating.

They will be told, correctly, why limiting the borrowing requirements of the government (the fiscal deficit) is essential to the purpose of holding down interest rates and the cost to taxpayers of servicing the debt (old and new) incurred on their behalf.

What will not receive much attention from the finance minister is a recognition of the influence of taxes on the ability of economically active South Africans to pay these taxes.

Evidence of policy failure, in the form of persistently dismal growth in South African incomes, is there for all to recognise. The rating agencies have identified the country’s lack of economic growth, and so of its tax base, as the long-term threat to the solvency of South African government debt.

It is not good economic policy to tax some goods and services at a much higher rate than others. Nor does it help to subsidise more favoured (by politicians and officials) sources of income.

The economy needs less taxation and subsidisation that significantly alters patterns of consumption and production. Transport and energy costs have a very large influence on the prices of everything consumed and produced in SA.

It is a mystery why South Africans appear complacent about the ever higher specific taxes levied on their demands for transport and energy, yet are so defensive of the 14% value-added tax (VAT) rate, with all its exemptions that in reality help the better-off more than the poor.

The Treasury is now looking to a tax on sugar added to soft drinks, which will add as much as 20% to the price of a litre of the offending liquid and also — not coincidentally — produce significant additional revenue. This focus on extra revenue will deflect attention from the full, perhaps unintended, consequences of such penal taxes. That is, not only less sugar consumed but added incentives for producers to avoid all the other taxes that accompany the legal production of soft drinks.

The highly penal tax rates on cigarettes, for example, have driven much of their production and distribution underground. When the price of a cigarette is cheaper on the street than in the supermarket, the practical limits of the ability to tax and to influence prices and demand have been exceeded.

The way forward is for the government to spend less, especially on the benefits provided to the nannies employed by an increasingly nannying state, which thrive on a growing but largely dispensable tide of regulation that inhibits production and employment. The full costs, and often marginal benefits, of regulation need to be much better recognised.

THE ECONOMY NEEDS LESS TAXATION AND SUBSIDISATION THAT … ALTERS PATTERNS OF CONSUMPTION AND PRODUCTION

The government also needs to recognise the cost savings were the private sector allowed to deliver more of the services that taxpayers fund, including education and hospital services as well as electricity and transport.

It should also sell off the assets of superfluous state-owned enterprises to reduce debt and interest payments they have been so assiduously adding to given their poor operating results.

South Africans should fully recognise that higher tax rates are not at all helpful to their economic prospects.

They should be calling loudly for less rather than more government, less spending and intervention by the government, which would lead to lower tax rates, faster growth and, indeed, increased revenue collection.