Tax hikes will cut revenue
The 2017 budget speech was clearly a case of a finance minister acting not in concert with the governing party, but alone. While Pravin Gordhan should be congratulated for maintaining fiscal discipline and reducing the budget deficit, the presentation was extremely disappointing in material respects.
It is a common myth perpetuated by political and other commentators that increasing tax rates will increase government tax revenue. Under certain circumstances, tax rate hikes have the opposite effect, decreasing revenue. There are at least two reasons for this:
Economic growth and levels of taxation are inversely related. The current rate of taxation (all taxation combined) is very high at close to 30% of GDP (below 25% is the norm), which is a disincentive to investment, to hard work and to business in general. Described as the marginal propensity to pay tax, South Africans are in that part of the taxation curve where increases in taxation, other things being equal, will cause tax revenues to decline absolutely in the medium term. SA’s tax regime is reputedly the 14th highest in the world and climbing.
The 2017 budget speech will almost certainly result in reduced economic growth and thus tax income within a very short period. The government makes no money of its own. In fact, it makes a net loss (parastatals included); it relies entirely on tax revenues generated in the economy by the private sector. Thus, to increase taxes now is short-sighted. To increase revenue, a reduction in the overall level of taxation is required. To balance the budget, a reduction in government consumption expenditure is required;
Our high-level tax morality will decline. The assault on tax morality relates to the huge and increasing disparity between very high levels of taxation and very low levels of service received by taxpayers. While most taxpayers understand the hugely important redistributive and social justice imperatives of our country, the disparity is now too large and the spending behaviour of government too objectionable. Tax avoidance and tax evasion are on the increase.
The Greek tragedy of huge public expenditure, low tax payment and lower tax morality is a serious possibility, in fact a probability.