Golden chance missed for SA to have a Hong Kong moment
Totally the wrong taxes were levied in the budget
Former Finance minister Malusi Gigaba lied three times to parliament.
He said he had no alternative but to target the work and wealth of the citizenry through higher income taxes and VAT. But as minister of Finance he must have known that much wealthier nations such as Hong Kong and Singapore use land rents almost exclusively to finance the state.
But worse, he did not explain that in 2107/18 income taxes and VAT will cost South Africa about R1.1-trillion in lost GDP.
In so doing the minister also showed disrespect for the Constitution. There, the Treasury is prohibited from collecting personal taxes. Section 228 states that taxes must not be raised which “materially and unreasonably prejudice national economic policies” of job creation, access to land and economic growth – all the things we crave.Therefore income taxes and VAT are forbidden because universally they are known as “dead-weight” taxes. That is, they burden both buyers and sellers; the buyer pays more for the product and the supplier receives less.
For example, at the introduction of income taxes in 1914, a R10 wheelbarrow cost R10. After 1914 the barrow cost about R12.50 with R2.50 going to the Treasury. These price increases diminish demand. Joseph Stiglitz, a Nobel economics prize winner, cautioned in 2010 against taxing elastic goods and services:
“One of the general principles of taxation is that one should tax factors that are inelastic in supply, since there are no adverse supply side-effects. Land does not disappear when it is taxed ... That is why it also makes sense, from an efficiency point of view, to tax resource rents (such as land and the spectrum) at as close to 100% as possible.”
And it is not that Gigaba was oblivious to the damages which personal taxes inflict. In announcing the creation of six new special economic zones in his budget, he boasted that the reduced corporate tax rate and employment tax incentives “will encourage exports, job creation and economic growth”.If that was his object, the correct budget would have opened up South Africa’s entire 122 million hectares as a tax haven, like Hong Kong.
Then Foreign Direct Investors (FDI) would queue up at our ports and harbours. According to the CIA World Factbook (2016) Hong Kong is the most inundated with FDIs. It hosts $255,000 per capita of FDI, 90 times more than South Africa. It manages this by capturing land rents for the bulk of its revenue. This is a rates and taxes type user-charge, excluding improvements.
As a result Hong Kong has no VAT and its personal and corporate tax rates are capped at 16% a year. No wonder this tiny island with seven million inhabitants but with no water, mineral or farm sectors to speak of, has 68 million passengers passing through its airport annually – four times more than OR Tambo.
The government owns all the land in Hong Kong so land rents are a given source of revenue. And popular too. The financial secretary withdrew a general sales tax bill from parliament in June 2006, citing lack of public support. This implies that citizens prefer paying taxes on where their lands are located, not what they do on it.
However, counter-intuitively, this does not seem to apply in South Africa. Here people are not vocal about Gigaba’s expropriation without compensation of taxing the hard-earned fruits of their work and investments on the land. They only get agitated when the state threatens to expropriate the land itself, without compensation.
A sure compromise is therefore to compensate landowners for their loss of rents by relieving them of income taxes and VAT.
South Africa then becomes a tax haven with people working a number of hours a day to pay the rent, depending on where they live. Thereafter all work, profits and interest are tax-free.The other plus is when the state appropriates land rents the capital cost of unused land reduces to a perpetual and reviewable rent. Then the state can afford to expropriate unused lands.
Having affordable land is also a huge economic growth generator. It will not only bring 27 million hectares of unused land into production, it will also boost state revenue by R162-billion a year at an average of R500 per month per hectare.
If the state were to charge realistic connection fees to Eskom and water providers a further R100-billion can be earned by state enterprises. Is this not enough, and more, for the hole in Gigaba’s present cash flow and to cover university fees and the national health scheme?
The minister’s second lie is that taxes depend on trust in SARS. That is not true because land rents can be determined entirely by public auction, without inspectors.
Minister Gigaba’s third lie was: “No matter how difficult the immediate challenges are, we know the future will be much better.” But he must know that the opposite is true because the higher he raises taxes on work and investments, the higher land prices spiral. According to Absa the average vacant stand (in Southfield) is now R780,000, 17 times higher than in 1994.
This is contrary to Section 25.5 of the Constitution which demands that the state make land more affordable and more, not less, accessible. This can only be achieved by capturing land rents – not wages, salaries, profits and interest.
For we know the higher land prices periodically prompt property bubbles which pinch the poor through toxic mortgages. And it is also common cause that unless raw land prices are lowered, the proletariat condition of the landless and jobless will be perpetuated.
This will continue the divisive dependence of the poor on an employer. A great nation-builder!