This article first appeared at Accounting Weekly.
Pictured: Tito Mboweni, finance minister, South Africa
With Budget Day fast approaching it is worth dreaming of a better tax system.
So, here we go. Hey Tito, how about a flat tax of 20%? It will save the economy, pay for social grants, and get business going again.
It would be great if we could hit the reset button and start our tax system all over again. If we did, we wouldn’t come up with the monstrosity now in place. A flat tax would avoid a stupid tax revolt and a just as crazy wealth tax. Finance minister Tito Mboweni has a golden opportunity to fix SA in one fell swoop.
A flat tax of 20% means no more VAT, income tax or any other forms of tax. It would be easy to administer – saving thousands in salaries and advisory fees. Most importantly, it would promote economic growth.
This is not exactly a radical idea. Most East European countries, including Russia, have adopted flat taxes. Russia dropped its tax rate to a flat 13% in 2000 and almost doubled its tax receipts as a percentage of GDP in 2001. The first European nations to go this route were Estonia (with a flat tax rate of 26%) and Latvia (25%). Though these rates were high, these economies achieved average growth rates of 6,1% in 2001.
Why Hong Kong is so prosperous
Hong Kong has a flat tax of 15% on business and property income, and a graduated tax of 2-17% on labour income. High income individuals pay a flat tax of 15% if they forego personal exemptions. As The Economist noted: “The territory’s tradition of simple and low taxes…is widely seen as a main reason for its stunning rise to prosperity.”
A flat tax would also give SA a huge competitive advantage in attracting investment in a world where tax arbitrage is a key factor in business location.
Economist Jasson Urbach says SA would be a very different place if we had adopted a flat tax all those years ago when it was proposed that a flat tax of 19%, with an exemption for income below R75,000 for compassionate and practical reasons, would have generated all the income the government needed.
“Since tax as a proportion of GDP has risen by about 3% of GDP since 2012, so the flat tax rate should rise at a similar rate. However, this does not make much of a difference to the flat tax rate – less than 1%.”
The critical point here is the cut-off level for tax: at R75,000, this means all income below this level is tax-exempt, which mainly benefits the poor.
SA Institute of Business Accountants (Saiba) CEO Nicolaas van Wyk is a long-time advocate of a flat tax. “If we truly want to be an open and free society then our tax system should support this. We want our citizens to achieve both economic and political freedom. Lets get a tax system that actually supports this idea.
Why a flat tax is progressive
“A flat tax is fair, easy to understand, consistent, avoids special interest and political meddling, and allows citizens to choose their own economic futures, without direction from Big Brother.”
One of the big arguments against a flat tax is that it is not progressive – in other words, the poor, with less money at their disposal, pay the same percentage as the rich.
There is a decent counter-argument to this: exempt the poor completely below a certain income threshold.
“The best arguments for the flat tax is the reduction in unnecessary compliance costs, administrative burden, and ill conceived criminal and civil penalties associated with the current system,” says van Wyk.
The existing tax system is broken
“Why do we have our best minds, both in government and the private sector arguing about how many angels can balance on the head of a needle? The problem is not taxes, it’s the system that is so complex as to the point of becoming ridiculous.
“Why is there a constant fight over VAT refunds? Why do we audit every taxpayer that is entitled to an income tax refund? Why do we have to suffer the indignity of penalties and interest, not for failing to pay taxes, but failing to update a postal address? Have we become a nation of warders and prisoners? Why all the animosity and suspicion? This is not the way to build a rainbow nation”.
It is estimated that the annual compliance costs are close to R16 billion a year in preparing tax filings, setting up tax structures, and fighting audits from SA Revenue Services (Sars). Why not give that back to the poor in the form of a blanket exemption, and so kill the argument that the flat tax is not progressive? Some believe that up to 62% of actual taxes received by government is squandered on administering a highly complex tax system such as we have.
Who are the vested interests keeping this illogical system alive?
There are so many vested interests in keeping the existing labyrinthine tax system going.
Van Wyk says we missed a golden opportunity to simplify and overhaul the tax system in SA when the Katz Commission was appointed to reform tax in SA. “The Commission itself was headed by people who live, breath and eat a complex taxation code. Who wants to get rid of a system that feeds the tax collection system so well?
“The reforms the Katz Commission offered was just more complexity, tinkering here and there in the name of progressivism to inadvertently dish out favours to some and penalties to others. I think that has saddled SA with a system that is rigid, illogical and broken. It is not delivering on its stated goal of delivering economic growth. Trying to tinker with this system is not going to work.
“However a flat tax will benefit everyone. We will be able to collect more taxes due to the resulting economic growth, reallocate expenditure wasted on maintaining the complex system to more productive applications, and get accountants and tax practitioners to focus on what they should be doing, which is to enhance business models and make SA more competitive. They should not be wasting their skills and knowledge on a broken system that everybody, except special interest, hates.”
The real burden of SA’s tax code falls on working people and the middle class. National Treasury estimates that 1.9 million individuals contribute roughly 80% of income tax. The wealthy can set up complex structures to pay as little tax as possible, as shown in recent cases involving billionaires such as Jeff Bezos, Howard Schultz (of Starbucks) and Donald Trump. In a flat tax system there wont be any place for them to hide.
Go on, Tito, just do it
So, go on Tito, do something truly revolutionary. You know you want to. You’ll be in good company: