The biggest dilemma facing South Africa’s personal income tax payers in particular is that they could be suffering from ‘double taxation’, for lack of a better word. This is perhaps one matter that continues to escape the attention of many analysts and economists alike, especially how it undermines savings, constrains growth and deepens inequalities. A country with low savings would inevitably realise poor investments, instability and less than impressive economic outcomes.
While countries conclude agreements to avoid taxing individuals more than once at international level, internally this matter receives little or no attention at all. Ordinarily, taxes are supposed to cover public goods including education, healthcare, security, etc. However, the poor state of hospitals, insecurity and schools drives millions to opt for the privatised schools, residences, hospitals, and so on.
The implication is that households spend up to between 80% and 95% of their incomes on similar goods. Put simpler, they pay twice for education, healthcare, security, water, etc. This view is supported by political economist Moeletsi Mbeki who in 2011 observed that the SA taxpayer, “is unique among taxpayers in paying twice for the same thing”. Conversely, economists on their part are quick to point that SA has a lowest savings rate. Although true, the problem with this lamentation is that it overlooks the notion of double taxation of citizens. It also avoids confronting the systemic or structural design of the SA economy.
In short, the post-apartheid dispensation has resulted in little or no changes that are necessary to lift millions out of poverty as well as to ensure more people enter the economy, not just as workers but also as the captains of industry. The democratic dividend is still very far away.
It undisputed that the SA economy has extremely low savings. The outcome of this is that, with all things being equal, there are leanings towards short-term consumption over long-term investment. In turn, the economy performs badly since over reliance on credit fuelled consumption results in low economic growth. As per the Harrod-Domar model of economic growth, the level of savings “is a key factor in determining economic growth rates”. But on the other hand, people are unable to save, and each day face falling standards and poverty. Even what they have saved via their pensions or retirement savings is not helping them at all. SA therefore has a rapidly growing poor working class.
Admittedly, savings aren’t a panacea for all that goes wrong in the economy. Too much saving creates its own problems too. In The General Theory of Employment, Interest and Money (1936), English economist John Maynard Keynes referred to this phenomenon as the ‘paradox of thrift’, which can easily lead to recession due to subdued demand in an economy. As such, a fine balance between spending and savings needs to be maintained at all times. SA is a million miles from facing this problem.
STANLIB economists Kevin Lings and Ndivhuho Netshitenzhe confirm, “SA has one of the lowest savings rates in the world.” SA’s gross savings is below 15% compared to a world average of 25.1%. This doesn’t come as a surprise in country where a citizens are squeezed to pay more than once for the same thing. This is also a place where excessive reliance credit is more like a weapon to destroy human life; it is doubtful that a SA consumer can survive without debt. A combination of debt and double taxation is a heavy load for citizens.
The argument in this opinion piece therefore is that if people were guaranteed delivery of delivery public goods and or services at all levels of the state, they would freely go to Baragwanath and Thembisa hospitals. They would send their children to Bhukulani (Soweto) and Thuto Mahlale (Mamelodi). However, many people go to Pretoria East Hospital, and enrol their kids at Woodhill College, a private school, a few kilometers just down the road. However, the sometimes overstated government failures aren’t the sole reason individuals and households are overburdened.
At higher level, the structural makeup of the South African economy is deadly for ordinary people. As such, this article also looks into such things as economic policy, attitudes of corporates and financial sector, conspicuous consumption, etc. as contributors to the problems of double taxation and its siamese-twin low savings.
Taxation as a duty of citizens
In simple terms, public expenditure is funded mainly through taxes but these are further sub-divided into different categories. The focus of this article, however, is on the tax that individuals pay called personal income tax. In December 2019, the National Treasury and the South African Revenue Service (SARS) published the annual Tax Statistics which covered tax revenue collections and tax return information for the 2015 to 2018 tax years, as well as the 2014/15 to 2018/19 fiscal years. In terms of this document, personal income tax makes up to 38% of the country’s tax receipts. The remainder of taxes comes from corporate tax (16,6%), value-added tax (25,2%) as well as other sources such as Import VAT and customs duties, which contribute around a total of 19,9%.
It is clear from these figures that an ordinary individuals contribute more to the fiscus ahead of the wealthy people and companies. Both wealthy individuals and companies specialize in illicit flows and tax avoidance, the situation wouldn’t have been this atrocious if they were fully compliant. A 2018 SA-TIED research study estimated that SA loses approximately R7 billion a year as a result of profit shifting by multinational corporations. South African online publication BusinessTech equates this figure to 4% of total current corporate income tax receipts. M&G‘s Lynley Donnelly reported, “About half the profits moved out of South Africa end up in Switzerland.”
SA corporations and wealthy individuals are equally guilty of defrauding the country and thus leaving ordinary citizens to carry the load of tax. In spite of the expose by both the Paradise Papers and Panama Papers a few years ago, nothing has been done to deal with fraudsters who stash their wealth in tax heavens to avoid paying taxes.
According to the New Encyclopedia Britannica (1998), the purpose of taxes is “primarily to raise revenue for government expenditures [fiscal purpose], although they serve other purposes as well.” American economist Richard A. Musgrave gives other purposes as resource allocation, income redistribution and income stability.
Overall taxes are used to fund government expenditure or fund public goods including education, healthcare and housing, security, infrastructure, etc. These public goods are therefore meant to be enjoyed by everyone irrespective of class or income. For example, all people use the same road irrespective of whether they drive in a Putco bus or an expensive sports car.
ln theory at least, everybody in SA should be getting the public goods. But the bigger problem is that these are either poorly managed on the side of the state or they are heavily commodified under extreme conditions of market fundamentalism. Public hospitals are accessible to the poor (and desperate foreigners), but their condition is concerning. Such things as the Gautrain or South African Airways, though public they are just too expensive for ordinary people to use them. Much of the public expenditure either bails out or subsidizes a small minority of citizens who are wealthier. It is thus a fallacy that taxes fund the welfare policies. In reality only a small of portion of the budget is spent on the poor.
Analysts wrongly label a budget as ‘pro poor’ based only on allocations, yet the money ends up in the pockets of big companies, banks and their black economic empowerment fronts. EFF leader Julius Malema also made this assertion about large white corporations gobbling public budgets at a Black Business Council (BBC) summit in March 2020. The story doesn’t end there, economic ideology is also a bigger problem. Neoliberal economics seeks to limit the role of government, and its adherents would rather see a ‘failed state’ than a prosperous one in order to make exorbitant profits. Education and healthcare are in private hands, which means they inaccessible to the public. For example, the most expensive school in South Africa costs not less than R300 000 per annum. The Washington consensus doctrine, instead of poor service delivery, is responsible for the rapid growth of a parallel state in SA.
Introducing the concept of double taxation
The normal definition of double taxation, according to Julia Kagan, is “a tax principle referring to income taxes paid twice on the same source of income.” Double taxation occurs when income is taxed at both corporate and personal levels. The intention is not to delve into technical issues concerning this topic but only to illustrate the concept. The focus is on individual taxation, so the company tax is not discussed. Narcisa R. Moşteanu is of the view that instances of double taxation at international level “may represent an excessive taxation for the taxpayer and an obstacle to capital movements, the process of increasing cooperation between countries and increasing the economic and financial relations between them.”
SA, through SARS, maintains both multilateral and bilateral agreements to avoid double-taxation. In June 2017, South Africa signed the Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting (BEPS), but it has not ratified it as yet. Only 19 of the 89 countries have ratified this BEPS multilateral instrument. The instrument aims to “prevent treaty abuse, improve dispute resolution, prevent the artificial avoidance of permanent establishment status and neutralise the effects of hybrid mismatch arrangements”. In addition, SA has bilateral double taxation agreements and Protocols with countries such as China, Botswana, Chile, Norway and Oman.
Matters of double taxation are taken quite serious in the international system either to protect individuals or to ensure that states don’t lose out when a citizen works abroad. For instance, the new amendments to the Income Tax Act, which came into effect from March 2020, stipulate that SA tax residents working abroad are “only be exempt from paying tax on the first R1 million they earn abroad.” It is thus mandatory for them to pay tax on any foreign earnings. Graeme Palmer, a director at law firm Garlicke & Bousfield, explained, “If there is a tax treaty between the respective countries it will eliminate double taxation.” What is funny though is that similar arrangements have never been thought out when it comes to the double tax citizens pay to get public goods.
Double taxation of individuals in an economy
The notion of double taxation of individuals in an economy is understood from a perspective that the provision of public goods is a responsibility of the state. Failure on the part of a state to perform this function means that individuals dipping deep into their pockets to fund the goods and or services. This results in a double tax of a kind since the citizens would be paying for the second time for exactly the same goods and or services. Individuals therefore utilise their limited means to close the gap created by government inefficiencies which they should have used for other purposes, including savings and accumulation.
The rough estimation is that households spend almost 80% of their hard-earned earnings on what ought to have been public goods such as education, healthcare, transportation and security plus food, housing and clothing. This figure rises to over 95% in light of collapsing municipal infrastructure and power blackouts plus corruption. Bottled water and alternative energy sources drive household spending to the brink. Overall, individuals have to rely on credit to supplement their incomes, and this leaves no space for any savings. Credit is the only avenue remaining for them get by in a month. Not everyone engages in wasteful spending and lifestyle as it is always purported. Individuals and households truly do not cope in extreme circumstances of rising prices and job losses, especially after coronavirus.
What is therefore could be happening in SA over the years is that the collapse of the public sector could be engineered to benefit the banking sector. Today, SA’s financial markets are at least 500% larger than the real economy. In the end, credit replaces savings as the important driver in the economy. Banks for example determine the resource allocation in the economy. They decide who can own a house, open a business, attend university, and so on. Normally, people boasts that SA has a world-class banking and financial services. Practical evidence, however, suggests that this could be the country’s biggest headache. Entrepreneur Vusi Thembekwayo complaints that SA’s banking sector which is “risk-averse as if it operates in Switzerland, and not in South Africa,” especially when it comes to small businesses. It is the same banking sector that appears to be least interested in easing the burden on citizens.
What makes the situation in SA even more grievous is the fact that pension monies of individuals aren’t used proficiently and wisely to minimize the load on their shoulders. Firstly, pensions of public servants are the power behind the erratic Public Investment Corporation (PIC) which invests in the very same large companies and monopolies that throttle citizens. At worst, the PIC (and other DFIs) have little or nothing to show in terms of what they’ve done over the years to change lives. Pensions of public servants could be depleted before many of even the retirement age. Companies misuse the public sector investment and have no obligation to repay the funds. Acts of corruption and maladministration also create an untenable situation that’s difficult to stomach.
Secondly, the talk of amending the Pension Funds Act with a view of utilizing prescribed assets to fund public infrastructure is another concern. Individuals struggle with rapidly rising cost of living and debt, yet they have billions of their money held by the bloated pension funds. There must be a way long-term savings like pensions and retirement savings can be used to help them with huge expenses like housing and schooling. Lessons from Mexico’s social security apparatus (Instituto Mexicano del Seguro Social or IMSS), which is entirely controlled by the state, show that contributors can borrow against their long-term savings, to buy houses and or upgrade them.
Nonetheless, there are fears that the amendments to the pension law could compel pension funds to invest in public infrastructure. At the same time banks and companies are accused of hoarding large amounts of cash. What this means is that cash hoarding is at the heart of SA’s economic problems, i.e. lack of investment. The financial sector therefore exacerbates poverty and inequality through holding massive cash reserves, and their unchallenged positioning in the SA economy. However, Mbeki thinks that uncontrolled consumption by black elites is the main problem. This is however grossly inaccurate. The financial sector destroys the productive sector of the economy due to its obsession with credit and excessive hoarding of cash.
Corporate sector also guilty of deepening double taxation of citizens
In his book A history of inequality in South Africa: 1652-2002, (2002), the late Stellenbosch University academic Sampie Terreblanche noted, “while the country’s transition to democracy [was] a significant development, a parallel socio-economic transformation has not taken place, and that many of the deep-seated inequalities that developed under colonialism, segregation, and apartheid being perpetrated in the ‘new South Africa’.” In this regard, Terreblanche put blame on the democratic state which adopted a conservative version of free-market and globally oriented capitalism. In addition, he criticized the corporate sector, “for its ruthless pursuit of its interests, to the detriment of South African society.”
The financial sector is in cahoots with large corporations and monopolies in stifling competition and increasing barriers of entry in most sectors of the economy. Value chains are tightly locked for anyone to penetrate and price determinations are entirely in the hands of these very powerful players in the economy. Any talk of small and medium business in SA is simply lip service and this has been the case even long before lockdown. Corporate SA are the worst culprits in killing the hopes of people for a better life. There is no logical explanation to introduce spaza shops in townships by large retailers whose intent is to mop every cent and destroy smaller players in the economy. Large retailers have killed corner shops that were previously owned by Indians, Portuguese and Italians in urban areas too.
What SA’s financial sector did is that it has completely replaced the state in all levels of society and corrupted the so-called black middle class. John Simpson, director of the UCT’s Unilever Institute of Strategic Marketing, remarked in 2013, “Sheer economic growth in a consumption-driven economy and easy access to credit helped to make the number of black middle class families rise.” The economy needs the high spending of black professional classes, and they in turn need credit to finance their expensive tastes. Terreblanche expressed his displeasure at the black elite for “its crass materialism and its apparent indifference to the plight of the poor.” But this situation cannot be sustained for long.
The post-apartheid architecture has thus given birth to a greedy, selfish, egocentric and parasitic credit-backed black middle class, and corrupt political classes with the assistance of the ever thirsty private sector. At the same time the overall output in the economy continues to slip. In a few years, SA will be importing simple things as toothpicks and other basic consumption goods. The deadly concoction of double taxation, unemployment, conspicuous consumption, uncontrolled migration, chocking economy, excessive reliance on credit and greedy corporate sector as well as the rapidly ailing state and theft is a time bomb that will soon explode on the faces of South Africans.
Double taxation of citizens in an economy has dire consequences for any country. The mere fact that working classes waste a large portion of their incomes on what they’d already paid for via taxes means that they have extremely low savings and or have little or no opportunity to accumulate assets and to save or re-invest to grow their asset base. Many other structural issues in the economy worsen the situation as well. The financial markets and companies seem to have no intention to contribute to the creation of the vibrant, productive sectors of the economy. They are quite content with the over-financialization of the economy and pervasive credit.
It is proposed that SA needs to increase the share of industry and labour-intensive activities to turn its fortunes around. Without production the economy will tank and citizens will be unable to service their debt. Monetary policy tools need to be used more to help consumers as well as to grow the economy. It also suggested that a functional state at all levels could solve many problems identified in this article.
Siya yi banga le economy!
By Siyabonga Hadebe