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Re-Thinking Taxation

07 January 2013, 20:10

An interesting submission from a News24 contributor (http://www.news24.com/MyNews24/Eliminating-Income-Tax-20130107) caught my eye this morning. Sadly, I had to quickly skim through it as I was on my way elsewhere. However, the article reminded me that, for many years now, I have been quietly advocating an alternative approach to taxation. Maybe it’s time to dust it off and air it again; a good wave around is always good for some entertaining vitriol from the accounting fraternity.

By way of a little historical background, (and grossly oversimplifying), national or regional taxation originally was primarily levied on landowners – in other words those who could create wealth from productive processes stemming from land usage. The ordinary peasant (read: the likes of you and me) were generally left alone by national governments on account of being too poor, not being fully human and being the property of the local lord/landowner (thereby making him liable for their taxes – the Magna Carta, for example, often lists serfs and peasants – and their children and animals - as property of the manor).

General taxation only really got started – and then as a purely temporary phenomenon – at the time of the Napoleonic Wars in order to fund the war effort. Once the debt was settled the taxes were then withdrawn. I guess governments in those days were a tad more honest and honourable…although, if I remember correctly, Britain still carries some debt from those days even now.

The notion of permanent general taxation only widely came into being in Europe and the United States at the beginning of last century and was aimed at funding the first duty of any government, viz:-  the defence of the nation against aggressors. Feudalism had, by then, largely collapsed and with, no doubt, some effective lobbying from the landed gentry, the burden of taxation was thought to be better spread over a larger section of the population.

The First World War and the Great Depression pretty much established the idea of general taxation – income-linked – as a viable and acceptable means of raising sufficient government funds for government activities. For the first time the administration and funding of many social relief and development programs began to be taken over from private charitable movements by central, regional and local governments.

As time passed more and more of what had previously been private and/or charitable initiatives (education, health care, roads, poor relief, public housing, and so on) were assumed by the state in addition its more traditional roles in law and order and national defence.

The administration of the ever-growing state role in everyday life then required an equally ever-growing bureaucracy to regulate and control all these new state duties. Requirements for state funding increased and so taxes began to rise and rise. In some countries (e.g. Sweden and Norway) personal income tax rates of 85% and more were seen.

The rules and conditions of personal and corporate income tax became increasingly more complex until they spawned an immense industry dedicated solely to the collection of, and exemptions from, tax. Take the public side of tax collection, couple it to the commercial side of interpreting and avoiding (NOT the same as evading) the demands of the taxman, toss in the huge lobbying industry which seeks to claim and secure special tax privileges for various economic sectors or industries – then you have a vast juggernaut of a parasitical industry which consumes a very substantial proportion of any country’s GDP without actually contributing anything to that GDP by way of production of wealth. And if you then add those persons and companies which, owing to the high rates of taxation, directly and indirectly EVADE tax – I don’t think that I need to spell it out further.

The complete abolition of income tax (personal and corporate) is likely to be much fairer and far more progressive if replaced with a wholesale and retail sales tax – much along the lines of VAT. (Just don’t call it VAT – the notion of adding value is spurious and facile; the value of an item or service is merely what one person may decide is of worth to him at a particular time and place; there is no such thing as a universal true value of anything; a humble potato carries greater worth in a time of famine than does a bar of gold).

Both government and the commercial sector would then be highly motivated to encourage, empower and enrich the populace at large in order to stimulate wholesale and retail spending. Higher disposable incomes = higher spending levels = higher taxation revenues. Screw up the job of running the country and the economy, making people poorer, then you’ll find yourselves (as a government or board of directors) short of funds, unable to fund your lavish overhead-funded lifestyles – and likely out of a job come the next elections (or AGM in the case of the corporate).

Such a tax is relatively efficient to collect and administer, not requiring armies of government employees to enforce obscure and convoluted laws of compliance and collection. And there’s no need to re-invent the wheel – SARS does a credible job of collecting VAT right now; they would have only to extend it. Not exactly rocket science.

Structure the sales tax to enable the less well-off to live securely and comparatively comfortably on their full incomes. Basics such as fuel, modest housing, education, food, clothing, communications, would be zero- or low-rated. Less essential items would attract higher rates on a set of sliding scales.

And if you fancy that yacht or diamond-encrusted cell phone then be prepared to pay for it accordingly; if you have the bucks to spend on bling, Nkandla-style housing, Rolexes, sushi, Blue Label and Havanas then expect to share some of your extravagance with those less well-off than yourself.

Sure, the private and corporate armies of tax advisors, consultants and other such predators would, by and large, disappear but they would just have to find honest work like the rest of us. But they’re generally pretty smart people (those of my personal acquaintance certainly are smarter than me – which probably explains why they are accountants and I’m not) and I’m quite sure that they could soon find ways to contribute positively to the GDP.

It might also be a way of getting our universities to stop churning out quite so many bean counters into an already overcrowded marketplace whilst simultaneously spurring on some initiative and innovation.

So, I’m sure all the vested interests in the current cumbersome system will jump all over me for being ignorant and simplistic. They’ll hasten to tell me just how complex and necessary the present tax system(s) is (are), conveniently forgetting the KISS principle. Well bring ‘em on.

And horse apples to them.

Rick.

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