High-income taxes strangle artery
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.