Financial services industry bill – we’re in dangerous waters – FMF

This is a wake-up call to the insidious ‘tax by stealth’ of our government, which has deftly used levies on the financial service industry to collect money without being in the slightest accountable to parliament. The private sector has for five years meekly gone along with this, either through ignorance or having been systematically conditioned to take instructions from these unitary and independent state entities, without question or opposition. As the author, Robert Vivian, a professor of Finance and Insurance at the School of Business Sciences, at Wits and a member of the Free Market Foundation’s Rule of Law Board of Advisors puts it, “No democratic society has ever willingly submitted to the kind of arbitrary taxation currently taking place in our country.” As you’ll see from his concise historical overview, wars have been fought when rulers arrogate such arbitrary taxation to themselves. Read on to hear from an expert shark spotter how warm and dangerous the waters are getting. – Chris Bateman

More taxation by stealth?

By Robert Vivian* 

No democratic society has ever willingly submitted to the kind of arbitrary taxation currently taking place in our country.

Robert Vivian

A long missing ‘money bill’ arrived earlier this year, disguised as the Draft Financial Sector Levies Bill 2021. This bill impacts on the entire South Africa’s financial services industry. In the history of the financial market, this is perhaps the single most important piece of legislation ever.

To understand this, three pieces of scholarly insight ought to be recalled. The first was Lord Acton’s insight into the driving force of history. History, he indicated, is shaped by the quest for power. Power, he said, always expands until stopped by a more superior power. The second insight is from Douglass North, Nobel Laureate in economic sciences who concluded that history matters and institutions matter. The third insight comes from George Stigler, another Nobel Laureate. He gave the world the reality of regulatory capture. His lifetime study of the economic theory of regulation found very little evidence that any regulation was ever in the public interest. Regulations were indeed in the interests of someone, but seldom in the interest of the general public. Stigler found that, in general, regulators are captured and to date, South Africa’s experiences of state capture have demonstrated the correctness of these findings.

The above three insights taken together explain South Africa’s current situation: politicians get into power and then discover that power can be used for their own enrichment. That is inevitable; power expands until stopped. What is supposed to stop this misappropriation of power are North’s institutions. If these institutions do not stop this expansion, then they have failed and, even worse, are captured or subsumed into that failure. The subsumed institutions then become part of the problem rather than the solution. The institutions introduced to constrain power then actually become instruments of further corrupt power. Institutions are those things that are supposed to impose constraints. The Rule of Law, parliament, the courts, the private sector, property rights and so on, are all examples of North’s important institutions.

The rise of the unitary, autonomous states-within-the-state

In recent years, we have seen the rise of unitary, autonomous states-within-the-state. These are new institutions that have been artfully designed to combine the three powers of the state into one institution. The two newly created ‘twin peak’ regulators are examples of this. Going back to the Roman days and made famous by Montesquieu the French writer, it was understood the three powers – executive, legislative and judicial – had to be separated. The new twin peak institutions combine all three powers within themselves. They are thus unitary institutions. That this has happened, is what Lord Action indicated always happens. The structure of these new intuitions is thus part of the corruption of power.

These institutions are novel to South Africa. Unitary institution means the three powers of government, which are supposed to be separated, all exist within one and the same institution. These new institutions thus have the power to make their own laws (legislative power), to implement these laws (executive power) and to have their own judiciary (commissions and tribunals) with punitive powers. ‘Autonomous’ means they do precisely as they please. Their mandates are so general and broad that they have no limiting mandate. They do not have, nor do they operate within, any clear or specific authorisation and are left to decide for themselves where their purpose and power starts and ends.

The power to tax and the rise of the money bill

These institutions have also arrogated to themselves the power to impose taxes and to spend these taxes as they please. They can exist and operate indefinitely without ever having to go back to parliament for any reason. They are thus unitary autonomous states-within-the-state. Because they operate in a country that has a parliament and independent judiciary, they perpetuate the deception that South African is indeed subject to the separation of powers, a circumstance that is sadly no longer true.

When it comes to the power to tax, this is where North’s point about history becomes important. Almost every government is and has always been enthralled with the idea of having the arbitrary power to tax and spend. But at an early stage in England’s history, the arbitrary power to tax was halted. It was halted by the institution, which eventually developed into parliament. King John tried to introduce the notion that he as king had the arbitrary power to tax, but his taxpayers – at the time largely the barons – would have none of that and the matter was settled in 1215 with the sealing of the Magna Carta. The common law position became clear and has remained so ever since. There is no power to tax without the consent of the people.

As the notion of parliament evolved, this became: no power to tax without agreement by parliament. There can be no tax without a specific Act of Parliament. In the 1600s, Charles I tried to evade this law, thus triggering the English Civil War. Again, it was made clear, there was to be no taxation without the consent of the people. In 1776, when the UK tried to impose taxes on its American colonies, the outcome was the America War of Independence; no taxation without representation. So, the common law remains as it has been for centuries: no taxation without the clear and specific consent of parliament. Of course, it was not long before attempts were made to sneak new taxes through parliament. To help prevent this, the practice evolved that taxes can only be imposed in terms of a money bill, which in South Africa must comply with Article 77 of the Constitution. So today, there can be not taxation in South Africa without parliament passing a money bill.

The power to spend – the appropriation bill

A second and allied common law subsequently evolved: government cannot spend any money unless approved by parliament. To spend any money at all requires an appropriation bill. It would be to no avail if parliament agreed to a new tax, but that the money so raised was then misappropriated by the executive. A second bill then becomes necessary. Constitutionally, no expenditure of taxes raised in South Africa may take place without a concomitant appropriation bill. Dicey, the leading Constitutional jurist, expressed this succinctly: “Not a penny of revenue can be legally expended except under the authority of some Act of Parliament.”

Taxes and the states-within-the-state

In 2016, when the twin peaks legislation was being processed through parliament, the Standing Committee on Finance asked the question of whether or not the legislation’s proposed levies were in fact not new taxes. After investigation and discussion, it was conceded the levies were unambiguously new taxes. Once this was admitted it became unavoidable that a money bill would indeed be necessary. That was five years ago. No money bill has yet been passed let alone any consideration given to an appropriation bill. In 2018, a draft money bill was published but never passed. Levies currently being paid by the financial sector are therefore taxes that are being collected unlawfully. Attempts to achieve the imposition of illicit taxes of this nature are what led to the English Civil War and to the American War of independence. No democratic society has ever submitted to arbitrary taxation, which is what is currently taking place.

The private sector increasingly being subsumed into government

Why has the private sector been paying unlawful levies for the past five years? Some may argue ignorance. Perhaps this is true in part, but a factual observation points to another more sinister development: the private sector is increasingly being subsumed into the service of government. With the states-within-the-state increasingly relying on their own legislation, implementation, judicial and punitive system, a docile private sector has become systematically conditioned to meekly take instructions from these independent unitary entities, without question or opposition.

It is well known that all taxes are ultimately borne by the public. Our government has discovered that it is much easier to impose new obligations on the private sector, knowing that the cost of these obligations will inevitably be passed on to the public, than the inconvenience of getting a new tax approved through parliament. The government thus acts through the stealth of private sector proxies in imposing new taxes on the public. For a similar new stealth tax, one need look no further than the proposed new state-owned bank deposit insurance ‘corporation’.

The private sector, a vital Douglass North institution, is thus one of the last remaining institutions that stands between these unelected states-within-the-state and the individual. It too, however, is increasingly failing, imposing upon individuals the tyranny that arises from this loss of constitutional order and protection.

Parliament becoming another failed institution

Returning to the Magna Carta of 1215: the premiere Douglass North institution was parliament, the law making institution. It bravely stood between unelected agents of government and the individual. That in history has been its premiere roll. In this capacity, the South African parliament is also rapidly becoming a failed institution. It has essentially surrendered its law-making function to ministers and unelected operatives ensconced within these unitary states-within-the-state. Parliament and parliamentarians have thus become largely irrelevant. They have delegated such wide, undefined powers that it is unnecessary for these agencies ever to seek legislation from parliament again. Thus, no institution any longer stands between the unelected arbitrary state agency and the individual. The solution to Lord Acton’s unlimited self-centered power are the Douglass North institutions. As these fail, nothing remains between the arbitrary action of the proxies of government and the now unprotected individual.

  • Robert Vivian is professor of Finance and Insurance, School of Business Sciences, Wits University, and a member of the Free Market Foundation’s Rule of Law Board of Advisors. The views expressed in the article are the author’s and not necessarily shared by the members of the Foundation.

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