High-in­come taxes stran­gle artery

Business Day - - FRONT PAGE - BRIAN KANTOR

The bud­get speech and ac­com­pa­ny­ing re­view re­ferred to an eco­nomic cross­roads, sug­gest­ing a new path is to be taken to ac­cel­er­ate growth in SA. There is lit­tle in the bud­get pro­pos­als to in­di­cate a way out of our eco­nomic dead end of per­sis­tently slow growth and ever-higher tax rates.

Yet gov­ern­ment spend­ing (up 3% in real terms) and gov­ern­ment rev­enues (up slightly more) and their share of a slow-grow­ing econ­omy is ex­pected to rise. The neg­a­tive feed­back from higher tax rates and higher tax rev­enues to fund an ever larger role for the gov­ern­ment in the econ­omy — on the growth out­look — is sim­ply not recog­nised.

Higher in­come and ex­pen­di­ture tax rates may help to bal­ance the books, but will not do any­thing to re­vive the cre­ative and en­tre­pre­neur­ial spir­its of the key eco­nomic ac­tors, the high-in­come earn­ers.

The depen­dence of all South Africans on them goes much fur­ther than the taxes they pay to fund wel­fare ben­e­fits. They earn their higher in­comes by di­rect­ing the mar­kets for jobs, es­sen­tial goods and ser­vices, and cap­i­tal.

And they help or­gan­ise the ed­u­ca­tion, train­ing and skills that make work­ers more pro­duc­tive and ca­pa­ble of earn­ing more.

They also take risks with their cap­i­tal — hu­man as well as fi­nan­cial — to in­no­vate in the search for bet­ter meth­ods and bet­ter prod­ucts and ser­vices, which is the very stuff of eco­nomic ad­vance. This bud­get and the ac­com­pa­ny­ing rhetoric will not en­cour­age them — it is likely to do the re­verse.

The scale of in­come re­dis­tri­bu­tion from the best re­warded to the wider com­mu­nity is large.

The bud­get re­view strik­ingly demon­strates this by show­ing that the top 10% of in­come earn­ers con­trib­ute 72% of all taxes (value-added tax and oth­ers in­cluded) while the bot­tom 50% re­ceive 59% of the ben­e­fits of gov­ern­ment spend­ing while con­tribut­ing 4% of taxes. The mid­dle 40% re­ceive 35% of the ben­e­fits for 25% of the taxes paid. Clearly, there is lit­tle scope for fur­ther re­dis­tri­bu­tion from the top 10%.

There is much scope for faster eco­nomic growth. But this will re­quire less re­dis­tri­bu­tion from the high earn­ers and much bet­ter re­turns (in the form of delivering the ex­tra skills that com­mand jobs and higher in­comes) from the large sums the gov­ern­ment spends on ed­u­ca­tion and train­ing. It will re­quire much bet­ter de­liv­ery by the state-owned en­ter­prises that per­form so poorly for all, but their own em­ploy­ees.

Pri­vati­sa­tion is the ob­vi­ous so­lu­tion to waste­ful gov­ern­ment spend­ing, but alas, is not on of­fer. What is of­fered by the bud­get is the prom­ise of “rad­i­cal eco­nomic trans­for­ma­tion” — a big­ger role in the econ­omy for black South Africans.

It is well recog­nised in the bud­get that eco­nomic growth is and has been trans­for­ma­tional and that trans­for­ma­tion with­out growth is im­pos­si­ble.

THE DEPEN­DENCE OF ALL SOUTH AFRICANS ON THE HIGH EARN­ERS GOES MUCH FUR­THER THAN THE TAXES THEY PAY

To quote: “Growth with­out trans­for­ma­tion would only re­in­force the in­equitable pat­terns of wealth in­her­ited from the past. Trans­for­ma­tion with­out eco­nomic growth would be nar­row and un­sus­tain­able….”

In sim­i­lar vein, the 2017 bud­get also states: “If we achieve faster growth, we will see greater trans­for­ma­tion, en­ter­prise de­vel­op­ment and par­tic­i­pa­tion….”

Trans­for­ma­tion with growth is in­evitable, most de­sir­able and most help­ful to the econ­omy. But poli­cies that in­tend to hand­i­cap white South Africans who play a cru­cial role in the econ­omy to favour a few well-placed, ad­van­taged black South Africans will only frus­trate growth and slow down trans­for­ma­tion.

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