Brian Kantor is not one for mincing his words, and he’s dead set on finding the answers to South Africa’s current economic challenges. He’s previously targeted the Reserve Bank, highlighting the way to curb inflation is not by increasing interest rates, as they’ll throttle the economy. But those words flew on deaf ears after a 25 basis point increase at the last Monetary Policy Meeting, which saw the repo rate hit 7%. And he is at it again. Kantor says the Davis Committee, as far as he can see, did not get to the root of the current problem. His revolutionary idea is to completely eliminate corporate income tax and replace it with a mixture of additional payroll and wealth taxes. Zero rating company earnings would provide a large boost for saving, capital expenditure, employment and the GDP growth rate. The sums involved are not trivial: corporate income tax yields about R200bn per annum or close to 20% of all government revenues. It’s bold. – Stuart Lowman
By Brian Kantor*
A revolutionary proposal to transform the prospects of the SA economy – eliminate company tax.
There seems little hope of permanently raising GDP growth rates. Persistently slow growth in SA threatens fiscal sustainability. It also threatens social stability. It prolongs the agony of widespread poverty. Something radical is called for to stimulate growth – and by radical I do not mean potentially disastrous expropriation of wealth or the introduction of a National Minimum Wage that, even if it relieves the poverty of those who manage to keep their jobs, will leave many more out of work and even more dependent on informal (illegal) employment and welfare provided by taxpayers.
The radical proposal to transform the prospects of the SA economy is to completely eliminate corporate income tax and replace it with a mixture of additional payroll and wealth taxes. Zero rating company earnings would provide a large boost for saving, capital expenditure, employment and the GDP growth rate. The sums involved are not trivial: corporate income tax yields about R200bn per annum or close to 20% of all government revenues.
The significant amount of tax saved adds to the case for eliminating the tax. Companies would save and invest in plant machinery and people much of the extra R200bn they would save in taxes. It would be a boost to the competitiveness of SA companies and could lead to lower prices. It would attract foreign capital because required returns – after taxes – directly investing in SA based enterprises, would be much reduced. It would make SA a haven for the establishment of head offices. Taxable income from global companies newly established in SA would be transferred in rather than out – as was a major concern of Davis Tax Committee.
Zero taxes for companies would eliminate all the distortions created when companies are taxed additionally and separately from their owners. Taxes on all income distributed by companies would be taxed at the income tax rates that apply to their owners, as is the case with any partnership. All the shareholders in SA companies would become what is known in the US as Master Limited Partners, enjoying the advantages of limited liability for debts but taxed as individuals or institutions at the same tax rates.
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Dividends would be taxed as would rental or interest income when received, at the same rate applied to all income. There would be no double taxation of company income and dividends as there would be no relief for interest or any other expense incurred by the company. There would be no deduction for depreciation or amortisation. How much to allow as a deduction from earnings would be company business alone, as would be the decision to retain or pay out cash, with due regard for economic depreciation and the economic income of the company.
The company could be required to collect a withholding tax on all dividends and interest or rent paid out by a company to its capital providers at say a 25% rate, to secure a consistent predictable flow of revenue to the SA Revenue Service (SARS). Owners would credit such payments in their tax returns. Pension and retirement funds as agents of owners and capital providers should be made subject to the same withholding tax. Individuals and their retirement plans, including all their collective investment schemes, would be dealt with in exactly the same way when taxed on income received, including taxes on realised capital gains that should be treated as income.
This would eliminate the major distortion caused by taxing individual savings plans at a much higher rate than that of the collective investment schemes. Personal income tax incentives to contribute to savings plans would not be prejudiced by zero company tax nor would direct subsidies to companies. Yet subsidies are much more transparent to the taxpayer than income tax concessions – a further advantage of zero company tax.
There is in fact no good economic reason to tax the income of companies separately from the income of their owners. Taxing companies probably happened originally because it was administratively very easy to do so. That a tax is convenient to collect, rather than is easy to impose the collection duties on a company collecting tax on behalf of SARS, does not make for a good tax – one that treats all taxpayers equally – and does as little harm to the workings of the economy as is possible.
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Dividends and the tax collected on dividends is very likely to increase significantly as company earnings rose – especially if dividends and interest and rent paid to pension and retirement funds were to be included in the tax net as they should be – taxed at say a 25% rate.
A social security tax at a low starting rate could help make up for the losses of company income tax. As indicated in the Budget Review, total payrolls in SA are of the order of R2 300 billion. 5% of this is over R120bn. In the first instance this is paid by employers, but in the long run the payroll tax likely to be paid, in effect, by employees as a wage or salary sacrifice. South African assets in the form of homes, pension funds shares etc. are of the order of R10 000 billion. Assets in the form of homes are already taxed at market value by municipalities. Wealth in the form of shares in businesses and pension funds etc. could be taxed at the same rate. A 2% wealth tax could bring in as much as the corporate income tax, about R200bn.
With the elimination of company income tax, wealth in the form of shares in businesses, incorporated and not incorporated, would get an immediate boost, an extra inflation-protected R200bn a year in extra earnings – capitalised at a more friendly rate of say 4% – because of the business friendly tax reforms. The R200bn permanently saved by business owners in taxes might be worth 25 times R200bn or more than R5 000 billion to its owners. In other words, more than enough to compensate pension funds and their like for higher taxes on their income.
A wealth tax would also have a popular redistribution flavour to it. But a combination of a wealth tax and an elimination of company taxes would do more than redistribute wealth. It would help create wealth and income and transform the prospects of the SA economy.
- Brian Kantor is chief economist and strategist at Investec Wealth & Investment.
- The views expressed in this column are those of the author and may not necessarily represent those of Investec Wealth & Investment.
