National Treasury has stated its intention to raise additional revenue by increasing taxes, and has informed Parliament of three new taxes it is considering. One is good, one is bad, and one is ugly.
In a parliamentary briefing on Friday, 6 November, according to BusinessTech, Edgar Sishi, the chief director at the National Treasury outlined three new tax proposals it is considering in the wake of finance minister Tito Mboweni’s Medium-Term Budget Policy Statement.
The intention is to announce new taxes when the national budget is tabled in February next year that would increase government revenue by about R5 billion. That would make little impact on a projected budget deficit of R266 billion, but since the pie-in-the-sky goal is to achieve a budget surplus by 2025/6, one supposes every little bit helps.
Whether the country’s shattered economy can cough up any additional tax revenue at all remains to be seen, and if it can, one wonders what the impact on the country’s long-term lack of growth might be.
That said, let’s briefly consider these proposals, and see whether any of them have merit. As it turns out, one of them does, but the others don’t.
The three taxes are an increase in the so-called ‘health promotion levy’, by which government means the tax on sugar-sweetened beverages, a wealth tax on high-net-worth individuals, and replacing all or part of the income tax with a land tax.
The ugly: ‘health’ tax
The tax on sugar-sweetened beverages, as its official name, ‘health promotion levy’ suggests, is intended to reduce the dietary intake of such beverages, and thereby reduce obesity rates and the consequent burden on the public healthcare system.
However, the government has never shown that the tax actually does what it says it does. It based its entire justification on a single paper, which modelled the rate at which government had proposed taxing these drinks. It made a series of assumptions that, if they all came true (which they won’t), would take 0.4% of SA’s population from fractionally above the official obesity line to fractionally below it. To imagine that this would have any impact whatsoever on the health of those people, or the burden on public healthcare, is preposterous.
I examined that paper and the likely impact of a sugar tax on public health in this 2016 column. When a paper came out that claimed to show a 40% reduction in sugar-sweetened beverage intake following the imposition of a tax in the US city of Philadelphia, I had a look at that paper and discovered that it couldn’t withstand even the most cursory scrutiny, and that its conclusions, as well as the excited media headlines that flowed from it, were unjustified.
For its part, the IRR also produced a policy paper, written by Anthea Jeffrey (with some contributions from Jasson Urbach and me), entitled A stealth tax, not a health tax. It comprehensively debunks the stated purpose of the tax, concluding that of all the possible public health interventions against obesity, a tax on sugar-sweetened beverages would be among the least effective.
More than 80% of South Africans do not consume excessive amounts of sugar. The health of the remainder will not be significantly influenced by the ‘health levy’. Worse than that, however, a sugar tax is highly regressive. It falls heaviest on the poor.
The proposal discussed by Treasury was not only to increase the rate of the sugar tax from its present 20%, but also to extend it to fruit juices. Although it is true that fruit juice typically contains just as much in sugars and calories as a sugar-sweetened can of soda, it is not true that they are automatically unhealthy at any consumption level.
Both South Africa’s national dietary guidelines and those of the UK recommend limiting daily fruit juice intake, to half a cup (142ml) and 150ml, respectively. However, scientific research has found that unlike with sugary sodas, which are not beneficial in any amount, fruit juice has a protective effect against cardiovascular disease. You should limit your daily intake to 150ml or so, but you actually should drink that 150ml or so every day as part of a healthy diet.
So now they’re proposing to impose a ‘health levy’ on something that is considered to be healthy, and should be in every child’s lunch box. This is perverse.
At least Treasury was quite clear that this time it is purely a revenue-generating measure, which wasn’t the case when the sugar tax was first instituted. Overall, for its lack of public health impact and its disproportionate impact on the poor, I would rate this tax proposal as ‘ugly’.
The bad: wealth tax
On the matter of a wealth tax, Treasury was rather confusing – or confused itself.
On one hand, it proposed ‘increasing tax revenue through higher taxes on high net worth individuals, including through a progressive net wealth tax, the limitation of deductions (such as for retirement fund contributions) and increasing capital gains taxes (sic) rates and security transfer taxes’.
On the other hand, it proposes, ‘The lowering of taxes at the top end of the income distribution to encourage wealthy individuals to stay in South Africa and continue to contribute tax and expand their businesses to create jobs’.
The wealth taxes, according to BusinessTech’s report, were proposed by the Budget Justice Coalition (BJC), a grouping of left-wing activist organisations which includes Oxfam South Africa, the Institute for Economic Justice, and the Alternative Information and Development Centre.
In their submission, this group appears to think the rich merely need to ‘pay a fair share towards the recovery from Covid-19’, by which they mean they should shoulder most or all of the cost of recovery from the government’s ill-advised lockdown policies.
Instead of viewing wealth as inviolable private property, or as a justified recompense for effort and ingenuity that has served to meet the needs and wants of people throughout society, they consider the rich as a source of wealth that ought to be heavily exploited by the state.
It considers profitable corporations as legitimate targets for increased taxation and believes the state should claim what it calls ‘excessive profits’, without defining that arbitrary term.
It complains that higher-income households tend to save their money or ‘speculate’ with it, so the government would be right to confiscate their money instead.
BJC appears to have no inkling of what happens with savings or ‘speculated’ (read invested) monies. That money doesn’t just sit around doing nothing. It capitalises the businesses that provide all our goods and services and employs our people. This capital gets allocated and re-allocated to those who are most successful at picking the companies that best serve consumer needs and wants.
Without savings and ‘speculation’, there would be no successful economy to tax, or even to feed the people.
BJC proposes a raft of tax increases, including confiscating R143 billion from South Africa’s richest one percent by implementing a wealth tax on net assets, increases to the top two income tax brackets, and saving R30.5 billion by cancelling retirement fund deductions, among many other means to pilfer the cash of the rich. It also proposes that government prescribes that retirement funds must invest in government infrastructure and reconstruction projects.
South Africa’s tax burden is more than twice as high as the world average, so Treasury appears to be rightly concerned that the rich will simply vote with their feet and leave for shores where their productive value is appreciated, and their property rights are not so threatened. Very many have done so already, which is part of the reason the government finds itself embarrassed for revenue.
So, while it wants to tax the wealthy more, it also wants to tax the wealthy less.
Over-taxing the rich would be a terrible proposal on its own, but this blatant contradiction makes it especially ‘bad’. Government can’t have it both ways.
The good: land tax
The BJC also proposes a land tax, ‘particularly of vacant/unused land’, in addition to all the other taxes it wants to see implemented.
Treasury takes a rather more interesting view of the concept of a land tax. It floated the idea to replace some or all of the income tax with a land tax.
In hearings held last year, the Parliamentary Standing Committee on Finance received the following comment: ‘The Constitution requires that the taxing power not be used in economically destructive ways. Income taxes and value-added taxes create large deadweight losses by reducing entrepreneurial activity and the incentive to work. These harmful taxes should gradually be replaced with a land-use tax, which are not harmful as they do not distort economic activity.’
In response, Treasury wrote: ‘Government recognises the potential improvements in efficiency from land taxes (and property), as highlighted in the OECD report “Taxation and Economic Growth”. Land is an immobile form of capital, which can increase in value due to public expenditures to improve nearby infrastructure. National Treasury has been holding and attending workshops to explore this topic. There are important practical and inter-governmental arrangements that need to be explored further. The instrument can potentially improve the efficiency of the tax system, but is unlikely to be a sufficient source of revenue to substitute all other tax instruments.’
The cited OECD report says that ‘practical tax reform requires a balance between the aims of efficiency, equity, simplicity and revenue raising’.
The idea of a land value tax is hardly new. It is most strongly associated with the journalist Henry George, who proposed it in 1879.
It is premised on the idea that unlike any other economic asset, land is found, not created. Instead of vesting all land in the state and making individual citizens mere tenants at the mercy of government bureaucrats, many economists favour the idea of taxing the value of land.
Notably, it appeals to economists both on the left and the right. On the left, it addresses concerns over inequality. On the right, it is believed that a land tax is the least bad tax (in Milton Friedman’s words), which would not reduce economic activity or increase land rents (in the words of Adam Smith).
Land owners benefit from the externalities of property and infrastructure development surrounding their land, but never pay for this benefit. If someone builds a school, a shopping mall, or a road nearby, the value of their property increases through no effort of their own. A land tax would internalise that externality.
In an assessment of the idea last year, I wrote: ‘Most taxes distort markets and discourage the very activity that is being taxed. Tax on labour reduces the incentive to work. Tax on built property reduces the incentive to develop. Tax on consumption reduces consumption. Tax on investment income reduces the capital available for investment. Taxing land, however, has a little net effect on the market. Although it reduces property values, it provides a compensating incentive to develop the property to its best use, or sell it to someone who will.’
It is also easy to administer. The valuation need not be concerned with improvements. It can be determined with a fairly simple model based on historical sales data and perhaps some inputs about surrounding infrastructure and economic development. There are relatively few landowners, and they cannot abscond with their land.
I’m not an economist, let alone one specialising in tax matters. I’m only partly sold on a land value tax, but I’m very open to the idea. It has its downsides. But it is a very interesting proposal to pursue, especially if it replaces taxes that we know negatively impact on economic growth, such as income taxes.
For this reason, and in keeping with the theme from ‘The Good, the Bad and the Ugly’, I’d consider a land value tax a ‘good’ proposal. It certainly merits serious discussion among experts, journalists and the general public.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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