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Eliminating Income Tax

07 January 2013, 07:48

Somewhere along the way the middle class of South Africa was convinced that income tax is a good idea. In fact it seems that not only is income tax accepted as a reasonable way for government to generate revenue, but that as one earns more, one should pay more. During the 2011/2012 financial year the government of SA has collected R250 billion in personal income tax.

Income tax however isn't actually a good or remotely fair way of collecting taxes :

1) You get nothing directly for them - you worked, you pay. In fact the more you work the more you pay. Each hour you work is taxed at a higher rate than the last ! What kind of an incentive to work is this ?

2) You get no credit for paying income tax. Government gets all the credit for providing health care, old age grants, roads, houses etc.with your money. Not you. When last did anyone thank you for the free healthcare they receive, or that child support grant ?

3) You get no say in what the money is spent on. If you lose your house because you are paying for a public official to build a big Nkandla is that fair ? Even good causes such as welfare are out of your hands - how much welfare should you be providing ? Is three to four people on welfare per taxpayer fair ?

4) You are a criminal if you get it wrong. SARS will penalise you, charge interest, garnish your income and turn you into a criminal for daring to work and make mistakes. Since when is wanting to keep the efforts of your own work a crime ?

5) The rules are ridiculous. Driving to work everyday ? Private mileage. Company cellphone ? Perk ! Medical Aid ? Pension fund ? Provident fund ? Shares instead of salary ? All these have rules about what you can and can't do, how much you can use them, who you can save with - and these are the "easy" ones. The irony is that as soon as a big enough chunk of money is invested and you begin to understand them the rules change and you are worse off again (eg. changes to the medical aid rules in this last tax year).

6) The cost of collection is ridiculous because of all the rules. See all those SARS employees costing the country billions a year ? They cost us R8 billion a year to chase down all the middle class people who haven't paid enough. 

7) Confusion over how much you earn. When you are offered a salary it is never what you actually get paid. How do you know you aren't being cheated ? With our poor education system results I wonder how many ordinary SA taxpayers know if they are paying the right amount of tax ? eg. Do you make use of a tool allowance ? Imagine how happy workers at Marikana would be if they earned R15 000 per month without any deductions from government?

You could argue that all this tax is necessary and that government has a lot to pay for. This is partly true, and one cannot deny that the government should provide certain key services. We need policing, schooling and infrastructure... but do we need the big departments we have built ? Do we need ALL the big departments we have built ? How much government do we REALLY need ?

A study by the Duke Centre in 2008 showed that direct taxes in SA were 15% of GDP in 1960. In 2011 it was 24.6% (down from a high of over 27% in 2008). Was the government unable to manage in 1960 ? The Duke Centre study noted that 18.6% was the average for middle-income countries.

The reality is that income tax has allowed government to spend MORE than they need to. Before income tax became the tax mechanism of choice government generated tax by charging for consumption and providing services. Customs duties, sales taxes etc.

In fact income tax hasn't been around for very long. The USA only really implemented it in 1913. A tax rate of 1% on people earning less than $453000 per year. Higher incomes paid more... the maximum marginal tax rate was 7%.  How did we land up with the rates we have now ?

The key to income tax is that it has no product which government has to provide in exchange for it. People NEED to work to survive. With income tax you can increase the rates and everyone will compensate by trying to work harder, because they have no choice - they are locked into mortgages, retirement plans and will lose them if they don't work harder. Government however can manipulate voters with more promises of free stuff in return for your hard work !

Government has to be more honest with consumption taxes such as import duties. If  the taxes on a product (eg. a fancy cellphone) increase you might actually get less tax because less people would want to buy it.

I hope this highlights the difference between income tax (PAYE, SITE etc) and consumption taxes (VAT, customs etc). The point I would like to make is that ALL the taxes we need can and SHOULD be generated from consumption taxes rather than income based taxes.

Income tax is a blank cheque for government to spend the labour of the country how it sees fit. Income tax can be eliminated immediately if government chose to. The impact on employment and the economy would be immediate and enormous - imagine another R250 billion in the hands of the middle class. This is just the kind of stimulus the SA economy needs right now rather than more welfare plans (youth dole!).

The number of jobs created by an economy that suddenly had this kind of cash injected into it would practically self fund the so "lost" revenue which government will argue it needs. As is stands government will simply get an additional 14% in VAT on any expenditure without changing anything.

The additional money sloshing around the economy will increase employment because people will want to buy products and services. Increasing employment will REDUCE the need for all these youth subsidies, unemployment grants, child welfare grants etc.

In addition to new employment opportunities, new companies will start - wanting to tap into the extra R250 billion. Starting that company is also MUCH easier because you don't need a big department to ensure that SARS gets all of that payroll tax.

Within 3 years the revenue collections from the consumption based taxes would result in similar revenues being collected. The difference being that when you buy a cellphone you GET a cellphone AND help pay for the infrastructure, welfare, schooling and police services instead of getting nothing for your hard work at all.

If you like what I have to say, have questions or just want to challenge the logic please feel free to contact me. Thank you for taking the time to read this !

Disclaimer: All articles and letters published on MyNews24 have been independently written by members of News24's community. The views of users published on News24 are therefore their own and do not necessarily represent the views of News24. News24 editors also reserve the right to edit or delete any and all comments received. publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

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