Dear Tito: Here’s where to cut tax, make grants to save SA. MUST READ! #budget

As the government gets set to deliver a revised budget on June 24 to deal with the damage unleashed on the South African economy by Covid-19, some economists and analysts are calling for tax relief and other business-friendly measures. This comes as many companies have collapsed or are in financial difficulty as a result of lockdown measures. Among those urging extensive tax relief and grants – even though government debt is rising – are Dr Lawrence McCrystal and Advocate Hein van der Walt of the Confederation of Employers of South Africa, who have put forward a detailed argument, below, about why this is the smart thing to do. Others expect the rich to be hit with more tax as Finance Minister Tito Mboweni has warned that we are much poorer. There are signs that Mboweni will take us by surprise, as he told lawmakers on Thursday that the Treasury plans to make “very serious and unusual changes” to its expenditure plans. – Jackie Cameron 

Originate a new business friendly tax regime with cash grants to rescue businesses and downsized government departments for a ‘new economic dawn’ 

Dear President Ramaphosa and Minister Mboweni, 

Cc Ministers, Presidential Councillors, Mr Willie van der Schyf, Dr Gerhard Koornhof, Mr Derek Hanekom and valued teams

Cofesa calls for           

  • A new business friendly tax regime and extensive tax relief
  • Across the board Corona Compensation Grants for businesses   
  • The drastic downsize of a bloated government, opulent wage bills and benefits

We support Minister Tito Mboweni’s expected unveiling of a major shake-up in spending and revenue forecasts for the recession-hit economy, your new approach to allow the government to refocus attention on growth-enhancing initiatives and share your view that we can “no longer take for granted that the baseline that was there last year will always be the case”.

A new business friendly tax regime with general tax relief needed as a direct stimulus to the economy

Even before Corona, taxpayers have passed breaking point and a decline of R63,3 bn less in tax income was expected which Finance Minister Tito Mboweni in May estimated to a fall in tax revenue by 32% or more. (Fin24 on 4th May 2020); a terrifying downward spiral.

Across the board Corona Cash Grants for businesses – the UIF-TERS R13bn paid out of R130bn surplus is a drop in the ocean  

A study by SEDA, a subsidiary of the DTI, has reported a first year failure rate of 75% for small businesses while Mr Alec Hogg reported in 2011 the average cost of one job created by the IDC amounts to R250 000.

The high costs of and dismal failure of emergent businesses merit substantial government grants to ensure the recovery and sustainability of existing businesses.

A precedent has been set to award R35 000 each to small farmers and R200 million relief funding for tourism.

Similarly cash grants across the board should be paid directly to companies in a bid to rescue those in distress, to stimulate the economy and to avoid further job losses estimated at potentially 2 million.

Minimum of R500 000 grants 

Instead of the DTI and IDC investing in emergent enterprises with a 75% failure rate all existing registered businesses should be awarded a basic minimum grant of R500 000 plus compensation for their loss in turnover.

Only about R13bn has been paid out so far by the UIF. This is only 10% of the R130bn surplus held in the UIF that is meant for national disasters such as Covid-19. To make an impact, we appeal to you that a large portion of the surplus, supplemented if possible, from other Government sources, be paid out as ‘distress grants’ to make an impact.

A large number of our Member Companies are struggling to keep their operations from drowning because they have had no cash inflow while cash has been flowing out to pay salaries, rent, etc. So now they have used up their cash reserves and have minimal cash to get their operations going.

Repayable loans will not solve our economic malaise. It is time consuming and costly to administer by an already bloated government bureaucracy. Grants instead, will directly and immediately stimulate spending with a ripple effect, including to generate tax.

It is within the ambit of the UIF Board to pre-empt an estimated further 2 million job losses linked to Covid-19. Employers have contributed substantially to the fund and it is morally and logically correct to use the funds to rescue businesses. While workers contributed 1% of their total earnings, excluding commission, to the UIF, employers contributed a further 1%.

UIF surpluses have also accrued due to many contributors who have emigrated and left their benefits behind, also by contributors such as senior staff and company directors who tend to  abandon their benefits, as well as long deceased people. The fund also accrued an estimated R70-bn income on investments over the last 10 years.   

Timely distress grants will pro-actively rescue thousands of businesses, including hairdressers and B&B’s, avoiding later reactive costly government enterprise development efforts which, in any event, have a historic failure rate of 75%.

The drastic downsizing of the bloated government sector and its wage bills

Already in 2019, The World Economic Freedom Index,  an index designed by sixty of the world’s top scholars from many disciplines, including three Nobel Laureates, were ‘deeply concerned by our “overly large government for a nation at its stage of development.”

A new business friendly tax regime and extensive tax relief as a direct stimulus to the economy

Nurture businesses, including SMME’s and micro enterprises. Reduced tax will be a direct incentive for growth.

The economists of the World Economic Freedom Index found that our very high, top marginal tax rate discourages the initiative and dynamism South Africa needs to build prosperity. South Africa’s top marginal income tax rate at 41 percent is considerably higher than Botswana’s (25 percent), the subSahara African average (33.17 percent), and the world average (28.98 percent). This puts South Africa at a considerable disadvantage compared to its competitors.

Even before Covid 19, president Donald Trump and the UK reduced company tax: We must follow America’s example where President Donald Trump reduced company tax from 35% to 21% to turn his economy around, the United Kingdom from 30% to 19%, and in China’s CIT rate is currently 25%.

  • Reduce VAT to 10% or even to 5%. In 2019-’20 VAT contributed R346.2bn to the budget. By reducing VAT by 5% (R115bn) will directly alleviate poverty and stimulate the economy.
  • The most recent increase of VAT to 15% negatively impacted on the economy. No business takes home 15% on turnover without any risk. In fact without any risk, government now profits more from businesses than the businesses themselves. High levels of taxation made Government the most profitable ‘business’ at the cost of economic growth. 15% VAT deters emergent enterprises in the informal sector to advance to the formal sector and register their businesses for VAT.

From 2015 the number of companies registered at SARS declined from 3,2 million to the present 2 million. The increase in VAT directly affected consumer spending and caused the collapse of large clothing retailers.

    • Reduce company tax to 17%. Similarly Mr Mboweni should reduce company tax to a suggested 17%. from an accumulated 42% (the current 28% plus 14% on dividends) and even as high as 52%, to enable entrepreneurs to build capital and pay taxes. The fact that an expected R63,3bn less tax will be collected than budgeted for 2020, signals that the ‘tipping point’ has been reached and that higher tax rates will generate less income.
    • Reduce personal tax to 11%. Personal tax needs to be reduced from 18% to 11%.
    • Reduce excessive property tax. Excessive property taxes should also be substantially reduced.
    • People have been taxed into poverty. Economist Mike Schussler has broken down the weighty tax burden placed on individuals in South Africa, showing that we have one of the highest tax rates in the world and hiking these will only serve to further stifle growth. (March 2020).

Broaden the tax base

A small tax base of 574 000 individuals contributes almost 20% of all tax in SA. A constant spiral of worsening fiscal statistics and higher taxes have been feeding a growing sense of despair about the country’s prospects. The Finance Minister can break that cycle which, hopefully, will boost consumer confidence.

Treasury’s scenarios showed that more than 7 million jobs could be shed (in addition to the present 10 m unemployed?) as a result of the virus and lockdown that has hugely reduced economic activity. Manufacturing, construction, trade, catering and accommodation, as well as financial and business services will be the worst-affected sectors.

Deregulation of business in general, and specifically small and medium enterprises will broaden the tax base, generate tax income and lighten government’s burden to provide welfare grants. Picking the ‘low hanging fruit’ will be at zero cost to Government and, we calculate, could generate, over time, between 22m and 30m jobs in S.A. plus more than 50m jobs on the African continent, and regain our lost position in relation to comparable economies.

A 121st ranking for business regulation disastrous for job creation –

The international panel of economists of the World Economic Freedom Index ranks South Africa 121st on business regulation and noted that few challenges are more important for South Africa than job creation and for that it needs to free its business to create employment. Overly stringent regulation can slow business expansion and weaken profits, which are both the means of further investment and the motivation for further investment. 121st ranking is a disastrous rank for South Africa and means that red tape is strangling business’s ability to create jobs and prosperity.

Create a deregulated environment for enterprises to flourish -Government’s initiatives to create entrepreneurs has failed and must be aborted.

Despite the economic ’boom’ experienced in the country between 2004 and 2006, the growth of small businesses has stagnated since 2003. Our remaining SMME’s not only need protection, but we need to see them rapidly growing in numbers.

The Index referred to above noted a big concern regarding burdensome regulations.

Registered companies declined from 3,2 million to the present 2 million 

From 2015 the number of companies registered at SARS declined from 3,2 million to the present 2 million. Start-ups declined from 250 000 (2001) to 58 000 (2011) and have been declining ever since.

SMEs have been under particular strain over the last 10 years

– Financial and business services sector:  83 000 fewer companies (37% decline). (From 222 532 in 2007 to 139 664 in 2016 )

  • Retail: 44 972 fewer companies (57% decline)
  • Agencies: 11 799 fewer companies (20% decline)
  • Wholesale trade:  6 310 fewer companies (28% decline)
  • Transport and storage: 3 378 (15% decline) 

Start-ups declined from 250 000 (2001) to 58 000 (2011) and have been declining ever since.

When we had 5, 579,767 small businesses in 2011, they employed an estimated 12 million people countrywide (Source: jtb consulting). This has declined substantially since then, primarily because of the Government’s laws and future regulations of Minister Nxesi will make it even worse.

Loss of entrepreneurs – Diaspora/brain drain: More than 400 000 high income professionals plus their families have emigrated since 1994  and millions of remaining individuals are utilising the easing of foreign exchange controls to let their money emigrate. (Thank you for calling for their return). About 3 000 super-rich (those with wealth of  $1million or R15million or more) “migrated” from South Africa over the past 10 years, Andrew Amoils, head of research at New World Wealth, told Fin24 in April 2019.  The monthly loss in tax is estimated to be between R10 bn and R20 bn.

Consequently deregulation will make some government  directorates and departments redundant, save costs and enable tax reduction

A new accord with chambers of trade and industry, business and commerce must be formulated for enterprise development.

Empirical evidence proves that governments cannot ‘create’ entrepreneurs. Only businesses, business leaders, enterprises and entrepreneurs can nurture and breed new enterprises.

Failure of government initiatives indicates that it is time to close those directorates, abort those initiatives and save billions. Enter into new accords with chambers of business, trade, industry and commerce for enterprise development.

Initiatives of government directorates, departments and agencies to create enterprises and entrepreneurs have failed. They should be aborted to save billions of Rands and enable tax reduction.

Our overly large government is a ‘deep concern’ – World Economic Freedom Index

  • Reduce the size of government for substantial saving.

The international team of economists questions as to whether South Africans are getting value for their tax money. Does their money go to providing a sound, well-functioning legal system and security that promotes well-being, and delivers essential services? Or is much of it wasted or stolen? they enquired and noted its concern regarding high taxation and our oversized government. Consequently downsizing government will reduce costs and  enable tax reduction.

Austerity calls for urgent action

  • Trim down salaries, fringe benefits, opulent lifestyles-  not only that of the 200 000 officials with salaries of more than R1 000 000 annually.
  • Cut down on fringe benefits such as international travel, expense accounts, housing, blue light brigades, spending such as for catering, funerals, workshops etc.
  • Move parliament to a central venue in Gauteng to save on travel, accommodation and other expenses. The Cape has become an international tourist destination. An increase of tourism incentives for the Cape should compensate for this move.
  • Consequently downsizing government will reduce costs and enable tax reduction

Overly large government spending and taxation can crowd out other economic activity and limit people’s economic freedom, and their ability to power growth and job creation. Nations that have outsized governments relative to the size of their domestic economy are penalised in economic growth and job creation. South Africa’s overall rank in Size of Government is 140th and its rating is 6.04. The low rating is a cause for deep concern for a nation at its stage of development.

Measured on a GDP per capita basis, the five nations ranked just above South Africa have an average score of 7.03 in the area Size of Government. Coincidentally, this is the same score of the five nations ranked just below South Africa when measured in GDP per capita terms. However, these nations are a full point ahead of South Africa in their EFW score which shows just how large the South African government has become in relation to the size of the economy.

After improving somewhat in Size of Government after Apartheid, South Africa regressed significantly in the 2000s.  Over the last decade, scores have fallen substantially, indicating government growth and weakening economic freedom in South Africa.

The Index found government interference in the economy through government enterprises and investment is far too great and weakens both economic freedom and the dynamism of the private sector.

Deregulate and incentivise for economic growth

Picking ‘low hanging fruit’ will be at zero cost to Government and, we calculate, could generate, over time, between 22m and 30m jobs in SA plus more than 50m jobs on the African continent, and regain our lost position in relation to these countries: we must deregulate to unleash prosperity.

The 2019 Index scores SA’s failure against

  • South Korea had a lower per capita GDP than SA’s in 1960. Today their per capita GDP is 32 times higher than our’s.
  • South Africa’s per capita GDP was a third larger than Singapore’s in 1960. Singapore’s is now 7 times higher than that of South Africa.
  • Botswana whose growth has outstripped even that of the Asian ‘tigers’.

We look forward to a game-changer for South Africa.

South Korea and China looked insignificant before embarking on major reforms. The Covid-19 crisis creates an opportunity to fix an economic strategy that has failed to generate the growth necessary to create a better life for more than a minority.

God bless the brave

Dr Lawrence McCrystal and Adv Hein van der Walt

Cofesa Confederation of Employers of SA

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