The political correctness of tax myths

taxation 6Is South Africa being fairly compared?

JOHANNESBURG – There is a perception that South Africa has a low tax to gross domestic product (GDP) ratio.

A recent article stated that South Africa has an average tax rate of 25%, which ranks us at number 130 in the world.

Well according to the World Bank, South Africa has the seventh highest tax revenue to GDP ratio when social security taxes such as unemployment insurance and compulsory pensions are left out.

While the average top marginal tax rate in Europe is 47% and much higher than in South Africa, the actual revenue is often far less than South Africa as married couples with children get different rates or house payments are allowed to be taken off taxable income.

So what you see in tax rates is not the same as revenue, which is obviously the actual money collected from taxes. So when the Davis commission looks at South African taxes and revenue it will find that most countries have higher effective tax rates and much higher social security taxes, but that South Africa has a high tax revenue to GDP level.

Leaving out one gambling haven called Macau and two bank dependant islands Cyprus and Malta, South Africa as a normal country is fourth highest out of 120 countries that have data for six of the last seven years.

Yes, South Africa has a higher tax to GDP revenue for government than Sweden! We are higher than the UK and we help Botswana reach the top eight easily with our customs and excise revenue while Namibia makes number 14 with our generous giving away of tax money. Lesotho and Swaziland could probably be in the top two countries but did not submit data recently. Of the 130 odd countries that did have data for the last six or seven years, South Africa is number seven.

The world average tax revenue to central government is 14% of GDP. A highly taxed continent like Europe comes in at a blistering 19.6% on average while the euro area is at 17.9% to GDP over the last seven years to 2012. Socialist havens such as Greece and Finland are at 20.7% and France, the latest left-wing fairy tale, is at 21.5%.

The capitalist and horrible, bloody terrible South Africa gives their central government 27% of all GDP in the form of tax revenue. Only Denmark, Norway and surprisingly New Zealand have higher tax revenue levels than South Africa.

The average middle income country which is the closest comparable type country to South Africa has an average tax to GDP of about 13%, which is less than half the South African tax to GDP rate.

So these sloganeering “researchers” and snipers are not only just academics making mischief but also sharing information that is actually completely and utterly false. The so-called academics are so far off the mark on taxation in South Africa that they must have a serious factual blindness as a disease.

The Davis commission is going to find it difficult to extract more money from the population as the small South African tax base already pays a lot in personal income.

Apart from this, the tax base is rather narrow and the typical salary is one of the few in the world that does not attract taxes but can be given grants. Last year the average salary of about R15 530 (world average salary of USD1 480 or thereabouts) attracted a tax rate of close to 12.5% which would be one of the highest amongst OECD (Organisation for Economic Cooperation and Development) countries. In Germany, which tops the list of OECD countries in this regard, the average salary pays 21% tax. The average personal taxes that an average salary attracts in the rich world are just 10.3% and the median is 8.4%!

Actual tax revenue as percentage of GDP excluding social security payments 2006-2012.

Tax revenue to GDP levels for selected countries.

Japan

9.8

Mauritius

18.7

United States

10.0

Slovenia

18.8

China

10.2

Kenya

18.8

Switzerland

10.2

Uruguay

19.1

India

10.4

Austria

19.2

Spain

10.7

Turkey

19.4

Germany

11.6

European Union

19.6

Canada

12.7

Greece

20.7

Philippines

12.9

Finland

20.7

Uganda

13.0

Portugal

20.9

Sri Lanka

13.2

Bulgaria

21.1

Middle income

13.3

France

21.5

Ghana

13.6

Sweden

22.0

El Salvador

13.8

Netherlands

22.6

Czech Republic

13.9

Australia

22.6

World

14.4

Italy

22.7

Egypt

14.8

Ireland

23.3

Malaysia

14.8

Israel

23.9

Peru

15.0

Angola

24.0

Russia

15.0

Iceland

24.1

Brazil

15.6

Morocco

24.4

Korea, Rep.

15.7

Namibia

24.6

Tanzania

16.3

Belgium

25.0

Thailand

16.4

Luxembourg

25.1

Armenia

16.7

Botswana

25.7

Zambia

17.0

Seychelles

26.2

Poland

17.2

United Kingdom

27.0

Ukraine

17.2

South Africa

27.0

Mozambique

17.6

Norway

27.8

Euro area

17.9

New Zealand

30.4

Chile

18.3

Denmark

34.0

Source: World Bank. WDI. Average for 2006 to 2012

Countries in yellow are SADC (South African Development Community). Botswana and Namibia get much of their revenue from SACU (South African Customs Union) agreement

Perhaps this is not comparing apples with apples however as SA plays a big voluntary part in the social security income where other countries enforce social security payments for pensions and the like, which is often shown in their tax rates.

(Most workers pay for retirement provision and many pay voluntary for medical insurance. This would quite easily add 8% plus to the actual overall tax and social security percentage to GDP ie: SA would surpass 35% total collections to GDP (not quite academic but using Sarb data & also UIF.)

The small number of taxpayers in South Africa get very little back as confirmed by treasury data showing that after social welfare checks and taxation our Gini coefficient drops to 0.47 from 0.63. That 0.47 is more in line with the world average and is important because we also get told we are the most unequal country in the world but that is before taxes. In actual real life the Gini coefficient is much lower!

Yes our taxation system makes huge inroads into the inequality that the country has. I believe if one takes housing, water and electricity into account inequality drops even further. But at most only one in ten South Africans pay personal income tax and the employer base is also one of the smallest in the world.

The latest General Household Survey shows that 45% of households have at least one person receiving a government grant. This is the highest rate that I know of in the world. Home ownership is a staggering 67% and is also one of the highest in the world. Seventy-eight percent of all housing is formal brick and mortar.

The problem is that although South Africa has a very high tax revenue level the economy does not benefit as nearly 14% of GDP is spent on government salaries – also one of the highest levels in the world.

Very little is left for economic infrastructure or real urban transportation and the like. Very little goes back to the part of the economy that works and creates the wealth and at this high level of tax revenue you can only do it for so long before the horse starts looking at greener pastures. The fact is economic infrastructure and assistance to firms have been lacking. Less is also then left for higher education and research and development.

Therefore in a way the high level of taxation has helped to lower the inequality but perhaps more importantly the high level of redistribution and of taxation have hindered growth and therefore the creation of new jobs to lift people out of poverty. That would have increased the number of people paying taxes and decreased the need for social grants which payments make up more than 15% of government spending (excluding electricity, water, transport and housing).

However the next time you hear South Africa is a horrible low tax country or that the rich and many firms do not pay enough tell them to look at the facts. When people tell you they are the poorest of the poor tell them the slogan is outdated – South Africa on government grants earns more than 50% of what the African continent does from work income.

Yes, that’s right. The myths become slogans and are today seen as conventional wisdom or political correctness.

The facts are quite something else.

 

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