The risk of upending the tax base

We want more

Much of modern economic theory has been about reducing the gap between rich and poor, and making a more equitable society.

Troublingly for social scientists, inequality varies wildly irrespective of the economic system. However, poor and autocratic societies tend to be more unequal than wealthy and free ones. And even where income disparities are wide (as in the US, where the poorest 20% of Americans earn as much as the richest 20% of Russians) it doesn't always mean that the poorest are scrabbling in the dirt while the rich dine on caviar

The South African taxation system is what is known as progressive; it falls more heavily on the wealthy than on the poor. The intention is that it is to be fairer.

There are 5.2 million individual taxpayers in South Africa, but 25% of them cover 75% of personal tax. There are 1.5 million registered companies, but 4,500 of them pay 76% of the total company tax bill.

In other words, South Africa’s population of 47 million people depends on 3% of its citizens to cover 40% of all taxes paid.

Depending on how you feel about rich people, you could be cheered or charged about such information.

California, whose tax system is even more progressive than South Africa’s, has a frightening problem. There, the top 1% of taxpayers cover 48% of the tax bill. That revenue was based on a financial bubble which has just exploded. The top taxpayers no longer exist and California has a $42 billion hole in their tax collection this year.

For perspective, that is a 40% decline in revenue collection in one year.

The number of dollar billionaires on the Forbes rich list has slumped by 29% as the net worth of the billionaires fell $ 2.2 trillion, or by 45%. In one year.

Emerging markets are only now starting to feel the impact of reduced buying in the rich world, and that is having a knock-on effect on our own wealthy elite. Even if South Africa enjoys a mild impact from the credit crisis, the tax collected from the top 3% could be down 50%.

After years of record collections by SARS, overall tax paid could be down by 20% by the end of financial year in February 2010. The implications are significant.

Government policy proposals about increased social benefits have to be paid for. Eskom has received R 176 billion in loan guarantees. SAA has received its annual bailout, of R 1.6 billion. Election campaign promises still have to be tallied.

Governments do not pay for these things, people do. And the people are broke.

This means that government is back in the era of deficit spending. Our current account deficit could reach 10%, the same as Thailand’s just before its deficit crisis back in 1997. “The rand, which has already fallen sharply, remains one of the most vulnerable emerging-market currencies,” declared The Economist in a recent study of the world’s most vulnerable markets.

There is a sketch by Monty Python in which John Cleese attempts to convince Michael Palin that the parrot he just bought from him is dead. The humour comes from Cleese’ deadpan attempts to prove the parrot’s demise while Palin is quite convinced the parrot is fine.

It is far less humorous when the parrot is the fiscus and government seems quite ignorant of its sudden ruin. The boom is over and there is no money. It has flown. Escaped and gone to the great money hereafter. There is no cash, no moola, no dosh. It is kaput.

The rising tax take over the past decade has allowed government to paper over underlying institutional failure. Corruption and mismanagement could all be afforded, as long as the boom continued.

Now, a government that wishes to be all things to all people is going to have to learn how to start saying no.