In 2017, Treasury increased the top marginal tax rate to raise revenue, expecting an extra R5.46 billion. Instead, revenue fell by R6.48 billion as high-income earners restructured their pay. This failure highlights limits in taxing the wealthy, challenges around funding national projects like the NHI and Basic Income Grant, and the harmful effects of wasteful spending, corruption, and BEE inefficiencies on the economy.
Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.
By R.W. Johnson
Worried about tax increases to pay for NHI and a Basic Income Grant ? ___STEADY_PAYWALL___ A fascinating experiment recorded by Chris Axelson, a senior official at the National Treasury, suggests that that may not be the way to go. In 2017 the Treasury decided to increase the marginal tax rate for those earning R1.5 million a year or more, from 41% to 45%. The Treasury calculated that this would produce an extra R5.46 billion in tax revenue. But in fact the opposite happened and tax revenue from that group dropped by R6.48 billion. The Treasury was left wishing that it had left well alone. The tax increase had been carefully put together, making evasion very difficult, and it had also been carefully implemented, yet the net result was that the Treasury would have been much better off if it had just left the marginal tax rate at 41%.
What had happened ? Those earning R1.5 million or more had simply restructured their income. Bonus and incentive payments fell steeply as did all manner of fringe benefits – car and travel allowances, plus allowances for the use of cell phones, laptops etc. Doubtless, in some cases these highly paid employees had arranged instead for their employer to pay more into their pension fund or allocate more shares in the company to them. By definition these were highly valuable employees and their employers were doubtless happy to make such adjustments in order to keep them.
The net result was to suggest that a limit had been reached and that it would now be very difficult to squeeze any more tax out of the people in the top income brackets. Moreover, there were indications that some of those subjected to the tax increase had also resorted to tax evasion. For South Africa is now a highly taxed country and the easy ANC assumption that there is always more money to be squeezed out of wealthy whites may be no longer valid.
This is, of course, an unacceptable finding for those determined to introduce NHI (costing R700-800 billion a year), a Basic Income Grant (costing R300 billion a year) or free pre-school education (uncosted but similarly expensive). When told that there is no money for such schemes and that even as it is, massive public spending cuts are throwing many teachers, nurses and even policemen out of jobs, the cry goes up that “you must find the money !” – in effect a call to simply print more money. This, of course, is simply not serious. The only way to increase tax revenue would be to increase VAT – a horribly unpopular option.
There are, however, ways of greatly decreasing state expenditure. A real crackdown on corruption and wasteful expenditure could save billions. One could simply announce that every national and provincial minister would be held personally responsible for any wasteful or unexplained expenditure by their department. When Jerry Rawlings was president of Ghana he would simply march corrupt cabinet ministers down to the beach to face a firing squad, but there is no need for such rough justice. If a minister knew he would have to make good any money wasted or gone missing from his department, behaviour would change.
Perhaps more important is the huge wastefulness of BEE. National Treasury spending reviews have found that out of a sample of 1,000 national government office leases 60% were concluded at an average premium above market rates of 45%. This is a prodigious waste of money on the basis of straightforward racial discrimination. Moreover, that is just one area of BEE wastefulness. Other examples abound. Remember when a few big mining companies used to supply Eskom with high-grade and cheap coal by means of conveyor belt straight to the power station ? In those days South Africa had the cheapest electricity in the world. But then a major BEE “reform”: took place. The big mining companies were forced to give way to a larger number of small BEE miners who expensively transported their coal to the power stations by truck. Moreover, the quality of the coal deteriorated and some of it was mere pieces of rock. But the BEE mining companies flourished enormously and their owners became major donors to the ANC. Curiously enough the wife of the minister in charge – Gwede Mantashe – became a mine owner herself.
Moreover the new Public Procurement Act explicitly empowers government departments to place considerations of “equity” (read: racial discrimination in favour of BEE) above value for money when making decisions on procurement.
This is a curious situation: in effect it is a basic government policy to enrich a small BEE elite. Imagine BEE property owners charging the state rents 45% above the market level. And this racial favouritism is called “equity”. Of course, it has long been a government objective to build a black middle class. This has been achieved largely by creating an overpaid public service –the people who are currently demanding a 12% salary increase or three times the rate of inflation. But the creation of a wealthy BEE elite goes considerably further than that. In effect this elite is able to charge the state massive rents simply on the basis of their skin colour.
The late Ben Turok, a Communist who sought to re-tool himself as a development economist, remarked bitterly not long before he died that the ANC had always sought to promote the interests of black business along with black workers, subsistence farmers and the black community in general, but no one had agreed that the BEE elite should be dominant, the hegemonic elite over all others. Yet that is exactly what has happened. In good part this is because of the ANC’s chronic problem of fund-raising. Enormous sums are required for election campaigns and to pay the ongoing costs of the party machine, which includes keeping many ANC ex-ministers and notables in the style to which they are accustomed. The days when foreign autocrats would donate large sums to the ANC at Mandela’s behest, are long gone and getting money out of the corporate sector has also become more difficult. So the party leans desperately on rich BEE businessmen – who naturally want their pound of flesh in return. This is what gives the BEE elite their primacy above and beyond other groups.
Ramaphosa’s new attempt to raise R2 trillion in foreign investment hit an immediate rock when he attempted to get Elon Musk to make his Starlink internet service available in South Africa. Musk immediately burst out “I’m not willing to give away 30% of my company !” Because, of course, that’s what BEE regulations provide for. It is, indeed, difficult to see why anyone would want to give away 30% of their company. This puts Ramaphosa on the spot. If he exempts Musk from the rule then every next company will require a matching deal. If he doesn’t exempt Musk from the rule then South Africa will find itself having a slower, less advanced internet than Malawi (which has Starlink). In general the deal will shed a great deal of unwelcome light on BEE as a barrier to investment.
Most of the left wingers who support African nationalist movements become disillusioned because in the end it is this small rich elite which emerges on top. So is African nationalism merely a way of carrying out a “bourgeois revolution” ? This doesn’t seem to be the case. For a start this new elite seems to waste enormous amounts of money on ‘bling’ of one sort and another: expensive weddings and parties, multiple fancy cars, top of the range whiskeys and so on. What it is not doing is invest in building factories, creating new companies, launching new products – the things that a new bourgeoisie would be expected to do..
Think of South Africa’s Jewish community. Without any state assistance Jewish entrepreneurs built enormous and productive companies – Pick ‘n Pay, Liberty Life, Bidvest, Ackerman’s, Discovery Health, Investec Bank and many more. Where are the African equivalents ? Patrice Motsepe’s companies are a lonely achievement. The acid test is what would remain if all BEE privileges ceased tomorrow ? How many African companies would compete on even terms with others ? One suspects that many would not survive. But BEE privileges can only be justified if they are creating strong and successful companies. Otherwise there is no point to them.
So here we have, on the one hand, the mainly white top 10% of income-earners taxed to the limit and, on the other hand, large resources dedicated to artificially creating a BEE elite which pushes up costs and pushes up state spending, making South Africa less competitive. Foreign investors are quite frank in saying that the BEE laws are the biggest single barrier to their investing in South Africa.
The lesson is simple. Stop trying to squeeze more taxes out of the tiny group of taxpayers who already contribute most of the state’s revenue. The limit has been reached and further tax increases will probably result in a fall in revenue. Instead concentrate on increasing the rate of economic growth. And the low-hanging fruit here is BEE. For example, the Mining Charter, which specifies that any new mining venture must have 30% black ownership has merely resulted in no new mines being sunk in over a decade. Why not just abolish the Charter ? No BEE interests would be hurt because, thanks to the Charter, there are no new mines. But Charter abolition would be a major signal to foreign investors and would likely spur investment in new mines, which would mean more jobs and more tax receipts. It would also provide us with a sample of what might be achieved – perfectly painlessly – by looking at other areas of BEE which could go. How about capping at, say, 5% or 10% the premium paid for BEE-owned office rentals ? That would still give BEE interests a handy lift but it would also constitute a huge saving for the state. Perhaps most of all, one could legislate that BEE should be a temporary phenomenon and that after a certain period all BEE enterprises would have to compete on level terms. It would make life simpler, fairer – and more prosperous.
Read also:
