analysis
Judith February
Louis XIV’s financial adviser was once quoted as saying: “The art of taxation consists in plucking the goose so as to obtain the largest amount of feathers with the least amount of hissing.” Have we in South Africa come to the end of the road as far as major tax reform is concerned? Has the goose been plucked completely? And if so, are we any better off for it?
The past seven years have seen sweeping tax reforms in South Africa that have largely left middle-income earners bearing a less disproportionate part of the tax burden. The Treasury has sought to reward middle-income earners by introducing a series of tax cuts.
In his presentation of the Medium Term Budget Policy Statement, Minister of Finance Trevor Manuel announced that next year would see further tax cuts for lower and middle-income earners, thereby increasing growth. He also announced an increase in social spending, especially on HIV/Aids. Many have drawn attention to the fact that we need to be careful to distinguish between allocation by the government as opposed to actual spending.
The proposed tax cuts and the cuts that have been enjoyed by taxpayers in the past have, however, not occurred in a vacuum. One of the major tasks of the post-apartheid government was to increase the efficiency and effectiveness of the South African Revenue Services (Sars). The task has been a monumental one a maze of old-style bureaucracy and the traditional inaccessibility of officials were some of the problems faced by the public when dealing with the Receiver.
In addition, tax evasion was commonplace and there appeared to be little administrative capacity or will to deal with the problem. According to the Margo Commission of 1986, characteristics of a good tax system are neutrality, equity, invisibility, certainty and simplicity, costs and, more importantly perhaps, perceived equity.
The increased effectiveness of Sars post-1994 has contributed to the tax system becoming more equitable efficiency in turn has caused a substantial broadening of the tax base by allowing further tax concessions. The Treasury has therefore been able to maintain the principle that it ideally does not want to collect more than 25% of the country’s gross domestic product by means of taxation. It has, in fact, attempted to reduce the amount to less than 25%.
If major, substantive tax reform is nearing its end, what have the changes been in South African tax law? Alternatively, a more important question may be to what extent have these changes contributed to the realisation of a more equitable society, one in which tax is collected fairly and efficiently and the state is given the financial capabilities to fight socio-economic inequality?
As a developing country South Africa’s taxation system ought to have as its aims the maintenance of economic stability and the narrowing of the gap between rich and poor. Traditionally South Africa has maintained a source-based system of collecting revenue. This in essence meant that all income that originated (or was deemed to have originated) in the Republic was taxable.
The new residence-basis of taxation means that residents will be taxed on their worldwide income. While the distinction between capital and revenue will always be important, a new dimension has been added to case law by the introduction of capital gains tax, which essentially allows for all forms of income to be taxed.
Whether a gain is of a capital or revenue nature is irrelevant, all that matters is that the individual’s net assets are increased, allowing for a greater level of consumption. Capital gains tax was implemented last month amid much scepticism from the business sector and the wealthy who will in all likelihood be affected. There has been criticism that it is a “soak the rich” tax, which Sars does not have the capacity to implement. There may, however, be “method in the madness”.
Some people, like Judge Dennis Davis, believe that capital gains tax, because it compels the taxpayer to maintain a detailed record of transactions, will enable Sars to collect taxes more efficiently as it will be aware of individual assets wherever they are. It therefore becomes a tool for the collection of more tax. Sars has said the tax on its own will yield about R2-billion.
The Second Revenue Laws Amendment Bill, currently being deliberated by the portfolio committee on finance, will signal further changes in corporate tax by, among others, taking a fresh look at taxation in the areas of intra-group transactions, unbundling transactions and share-for-share transactions.
Analysts predict that the next five years will see changes in the tax system that will arise largely as a result of globalisation and the effects of this on South African trade, taxation and the economy. In addition, we may see the focus on the taxation of e-commerce and a clamping down on “white-collar” crimes. Because of the low level of savings we may see greater incentives given to those who do save.
The increased efficiency of Sars and the consequent increased revenue, however, must be linked to an increased capacity by the government departments to spend such money where it is needed most. The government has recognised that capacity to spend is a problem and two weeks ago even mooted a skills audit in an effort to address the problem. It is tragic that more often than not the problem is not a lack of resources but a lack of capacity to spend money.
The taxation system may have become more equitable, but only coordinated implementation by government departments will be able to ensure that increased revenue leads to effective spending. It is only through effective and targeted spending of taxes that socio-economic inequality can be eradicated. So, to complete the analogy, the rub may not lie in the plucking of the goose, but in what one does with the feathers. Herein lies the challenge for the government.
Judith February is a legislation and policy monitor at the Political Information and Monitoring Service of the Institute for Democracy in South Africa. This article is based on some comments made by Judge Dennis Davis at a budget seminar held last month