Taxing the poor so that the rich can buy expensive cars

Helping the rich...

Taxes are regressive. They fall more heavily on the wealthy than on the poor, partly because the rich have more money, and partly because one of the objectives of taxes is the politically tactile issue of “redistribution”.

But taxes must be sensitively applied or they can make everyone poorer.

Imagine a tax that was levied only against the poor in order to purchase for the rich trifles and luxury goods. It would almost be like slavery, wouldn’t it? Those least able to afford it required to waste the little that they have subsidising the good life for people quite capable of paying for things for themselves.

The likely response would be civil disorder and violent protest; perhaps even the collapse of the nation in an uprising of the oppressed.

However, you have only to package such a tax as a necessary evil for saving jobs, and – at once – everyone is satisfied.

Welcome to South Africa’s motor-industry, where the South African taxpayer subsidises the purchase-price of rich Europeans’ and Americans’ luxury sedans. It’s called the Motor Industry Development Program, the MIDP. The intention of this subsidy is to promote exports and overcome the distribution cost of sending a car made in South Africa 10,000 kilometres across the ocean to rich car-buyers elsewhere.

It’s worth around R 15 billion a year, according to Frank Flatters, Professor Emeritus of Economics at Queen's University in Australia.

That’s quite a bit of cash. It means that we give a discount of over R 80,000 per exported car to wealthy buyers in foreign lands. Or, a larger profit to the multinational corporation that produces them and isn’t officially based in South Africa anyway.

You are also paying about R 25,000 extra on an entry-level budget car because of the 29% import tariff. Worse, is that – as a taxpayer – you are already paying R 250 more tax a month to subsidise the motor industry, just so that you can enjoy the benefit of paying more for your car.

If we simply closed down all the factories and divided up the money amongst all the people working in motor-manufacturing, it would amount to R 121,000 per person, per year. That’s significantly more than most local industrial workers are paid now.

But think of what else we could do with that much of our tax money. It could increase the health budget by 24%; sufficient to build 15 shiny new 750-bed hospitals a year. Or we could increase the education budget by 14% and build over 800 new schools a year. Or we could put some of the money towards paying unemployed motor-workers a salary and reskilling them for new jobs, as well as spreading the money between health and education.

Would the end of the subsidy mean the end of our motor industry? Of course not. Almost 70% of their production is sold locally anyway, and imported vehicles account for over 40% of purchases. Cheaper cars would also allow more people to afford them, increasing the number sold.

In May 2008, the Australian Government Productivity Commission released a report entitled “Modelling Economy-wide Effects of Future Automotive Assistance”. Since our MIDP is modelled on their subsidy program (ACIS), the findings are revealing: “Further reductions in assistance to the automotive industry would generate net benefits for the Australian community through improved usage of resources ... the current plan to reduce automotive tariffs to 5 percent in 2010, and to terminate ACIS in 2015, offers greater net benefits than alternative options that entail lesser (or more prolonged) reductions in assistance. This is particularly so when allowance is made for the likely deadweight costs of raising tax revenue to make up the revenue loss associated with ACIS subsidies.”

The subsidy is only 6.5% of motor industry revenues, but scrapping it would enrich the lives of all; especially those of the poor.