Another Budget, another rise in taxes. Despite some tax relief in recent years, South Africa’s tax burden remains among the highest in the world. Could there be a fairer, more effective, simpler and less harmful way to raise the revenue the government needs to survive?

I was going to write a column about Tito Mboweni’s Budget Speech for 2019, but frankly, it had all the substance of smoke blown in your face.

He opened and closed with Bible readings, which is surely quite inappropriate for a government minister addressing a joint sitting of Parliament. Perhaps he misunderstood the job description of a “minister”. At least it reminded us that we’re walking through the darkest valley, in which we can find no Earthly comfort.

He kicked the Eskom can down the road by injecting R23-billion per year for the next three years. He made only a token gesture on slashing the government’s bloated civil service wage bill, by offering early retirement to a few. Wouldn’t do to announce actual job cuts on the eve of an election, now would it? Gotta buy those union votes!

About the perpetually debt-distressed state-owned enterprises, he asked: “Isn’t it about time the country asks the question: do we still need these enterprises?”

Sadly, he didn’t answer this question, saying only that strategic equity partners would be found “where possible”.

He said we are masters of our own destiny, right after reporting that South Africa spends R1-billion per working day on debt interest payments alone, and our debt-to-GDP ratio is now expected to hit 60%.

Moody’s has been maintaining the fiction, not shared by any other rating agency, that South Africa’s debt remains investment-grade. But Brazil’s debt is not, and South Africa’s credit default swaps are more expensive than those of Brazil. That means ensuring government debt against default is more expensive to do for South Africa than for junk status Brazil. We should expect Moody’s to cave to reality, eventually.

Mboweni promised that the government is determined to regain its fiscal prudence, and then we’ll be on our way back to the plum years, but first, he has to widen the budget deficit from R215-billion to R243-billion.

Mboweni raised what taxes he could in an election year – sin tax and the fuel levy – and left income tax, VAT and company tax alone. He promised that SARS would get better at collecting tax, which isn’t exactly an ambitious aim given its deliberate destruction under former president Zuma.

All in all, it was a dismal Budget which highlighted the precarious state of South Africa’s finances and the complete lack of ideas – other than splitting everything into thirds – about how to get out of the pit we’re in.

It was uninspiring hogwash, perfectly in keeping with President Cyril Ramaphosa’s pronouncement that “we are hope merchants”. All they have to sell is hope, as in, “close our eyes and hope for the best”. South Africans can’t butter their bread with hope.

It is abundantly clear that the government needs to balance its budget. It needs to redirect its expenditure to areas where it can materially improve the living conditions of South Africans. And since basic public infrastructure like water and electricity are in such a sorry state, it is unlikely that we can expect cuts in expenditure any time soon.

We all hope for a fiscally prudent government, in which public infrastructure is adequate and in good repair, most of the SOEs are shut down or sold off, a large chunk of the government payroll is slashed, make-work public works projects aren’t used to disguise the true state of employment in the economy, the state doesn’t squeeze the private sector out of major markets, the Cabinet is trimmed to perhaps a dozen ministries, debt is repaid, and tenders aren’t a cesspit of corruption, profiteering and wasteful expenditure.

But even such a government needs revenue. Even the libertarian ideal of a night watchman state, responsible only for protecting life, liberty and property, needs a budget to operate.

How best to raise this budget is a difficult question. South Africa, like most countries, levies a plethora of taxes on everything from income and profit, to asset sales and foreign trade, to fuel and retail products. Taxes are complex, both to comply with and to collect. They distort markets in myriad ways, many of them unintended. They’re inefficient.

South Africa also has a high tax burden. At about 31.3%, the country ranks in the top third of countries for highest tax-to-GDP ratio, at more than twice the world’s average tax to GDP ratio of 14.4% in 2017.

South Africa’s tax freedom day, which is the date on which you stop working for the government, and start keeping your own income, was 13 May in 2018. That’s an improvement on the year before, when it was 25 May, but it is still a full month later than tax freedom day in 1994, when it was 12 April.

South Africa’s corporate tax burden, at 5.4% of GDP, is also far higher than the world average of 2.8%, according to economist Mike Schüssler. In fact, he says it’s the fifth highest in the world, and personal income tax rates are the 12th highest in the world. That’s hardly a clarion call for new investment, and it’s an excellent incentive, for those who have the skills and money to do so, to emigrate, leaving the country even worse off than it already is.

South Africa simply cannot afford higher tax rates without depressing the economy to such an extent that it would actually reduce government revenue.

Many alternative tax systems have been proposed over the years. A flat tax would tax everyone at the same rate. This has the economic benefit of not overtaxing income that could otherwise be invested in productive activity. It is also simple to comply with, and to administer.

Flat taxes may appear attractive, and they have certainly worked in some countries that adopted them. Estonia springs to mind as the obvious example of success. Other flat tax countries, like Bolivia, Belarus, Kazakhstan, and Madagascar, don’t exactly fit the mould of vibrant, growing economies, however. The largest country with a flat tax is Russia, which levies an income tax at 13% across the board, but although its growth was strong between 1999 and 2008, its economy has been pretty stagnant in recent years.

A flat tax also has the political disadvantage of not being progressive, that is, the rich do not pay more as a share of their total income than the poor do. It is arguable that the poor cannot afford a flat tax, and it would keep more people in a poverty trap than a progressive tax does.

To mitigate this objection against a flat tax, one could exempt a certain amount of income from the tax. A more sophisticated variation – and much more politically palatable in a country that pays for social welfare – is the so-called negative income tax, proposed by Milton Friedman in his 1962 book Capitalism and Freedom. Everyone would pay tax at the same rate, but there would be a set threshold for paying tax. If that threshold is higher than reported income, the tax on the difference would be paid to the taxpayer, instead of collected by the taxman.

For example, if the tax rate is 20%, and every income earner were to be permitted to deduct R100,000 plus R20,000 per dependant, a two-income household of five people would need to earn more than R260,000 per year before they started paying tax on the excess. Anyone earning less than this would instead receive (not pay) 20% of the difference, so the same household earning R100,000 per year would receive a R32,000 subsidy (20% of the R160,000 they earned below the threshold). The same family with no declared income would receive R52,000 (20% of the threshold) in cash. The exact threshold and tax rate would be set to meet the needs of the poor as well as the revenue needs of the government.

Another tax proposal is a consumption tax. Every tax would fall away, except VAT, which would be raised. Again, to guard against overtaxing the poor, many basic necessities could be exempted from a consumption tax, just as we do today with VAT. Food, education, non-elective healthcare and basic housing could all be exempted. Another means of achieving the same thing would be to pay everyone a rebate in advance, which would render purchases up to a set threshold effectively tax-free.

An age-old but rarely-implemented idea, and a firm favourite among economists, is a land value tax. Often associated with the journalist Henry George who proposed it in 1879, a land value taxed is premised on the notion that nobody has an automatic right to claim land, and thereby deprive it from other people. Unlike any other economic asset, the land is found, not created.

Thomas Paine, in 1797 wrote:

“Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds.”

Having been a lifelong supporter of land property rights, I can’t say I’m entirely convinced by this argument. Like most libertarians, I’m more inclined to agree with John Locke, who made an argument in favour of private land ownership by virtue of the effort expended upon its improvement, which forms the basis of the “homesteading” principle by which land comes to be owned in the first place.

It is a shaky basis for claiming land ownership, however. In many places – like South Africa – it is politically controversial. What about people or groups who previously used land, but did not enjoy formal ownership, and lost the use of that land when “homesteaders” claimed their stakes?

Locke himself admitted that land ownership only works if there is sufficient land left over for everyone else to enjoy. Adam Smith said nothing could be more reasonable than a land value tax. In his analysis, it would not reduce economic activity and would not increase land rents. Milton Friedman called it the “least bad” tax.

So there are certainly respected free-market economists who like a land value tax. At the same time, it appeals to left-wing economists who are more concerned about material equality, like Joseph Stiglitz and Paul Krugman.

There are several reasons why land value taxes are appealing. The value of land is fairly stable. Unlike buildings, which may be erected or fall into disrepair, or company profits, which may experience a boom one year, and a bust the next, land value is closely related to the desirability of a location. It rises with proximity to natural resources, public services like transport, and business or industrial hubs. It is lower in peri-urban areas, where occupants would incur long commutes and other costs. It is lower still in rural areas where the value of land is limited to agriculture.

A land value tax effectively charges landlords for improvements made by others in the area. If taxpayers fund better roads or transport systems, or developers build a nearby shopping mall or school, the externality benefit landlords gain is internalised by taxing the increased value of their land. Conversely, if someone reduces the value of their land, for example by air pollution, crime or traffic congestion, landlords are compensated for the harm such externalities cause because their land value tax will become lower.

It also spreads the costs or benefits of externalities more fairly. If a large shopping mall were to be built in an area, local landowners would benefit from a rise in property prices, but local tenants would suffer because of increased congestion. Taxing part of the windfall to property owners will go some way towards alleviating this unequal impact.

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.

A land tax is relatively easy to administer. It cannot be offset by dubious losses or hidden in tax havens. If it is not paid, the land itself is available for seizure.

For all its apparent benefits, there are significant objections to a land value tax, too. It seems awfully close to the socialist idea of vesting all land property rights in the state, which would then lease it back to tenants.

I don’t think it is that much of a capitulation on property rights, however.

For a start, the title would not be held by the state. There is no way a land value tax would permit the state to arbitrarily expropriate any land, unless it radically re-evaluates land, which could easily be prevented in law, or challenged in court.

A land value tax cannot exceed the potential rental income from the land – since the owners would otherwise abandon it. The actual land value would be reduced by exactly the value of the tax, which means that the operation of a normal buying and selling market should not be impeded.

It is true, however, that when land value taxes are imposed, they place a heavy burden on existing landowners, comparable to a windfall tax or expropriation of part of their property. Future landowners will not be so encumbered, however, because the land tax will be reflected in property prices.

Some argue that a land value tax could not make up for the revenue extracted from today’s cornucopia of income, corporate, excise and consumption taxes. If true, one could argue that it would at least permit the government to significantly reduce these taxes, which would reduce market distortions and disincentives by an equal amount.

Another concern is that landowners might not have readily available cash to pay a land value tax, although this could be ameliorated by allowing the tax to be deferred to the date of sale of a property. A land value tax would also be hard or impossible to implement on communally-owned land, of which South Africa has a lot.

Perhaps the biggest problem with a land value tax is how to determine the value in the first place. Value arises in markets, as a result of the aggregate behaviour of buyers and sellers. The idea that a central authority can determine market values is anathema to free-market economics. However, properties are already valued for the purpose of taxation, and valuing land is simpler than valuing properties with improvements. In other contexts, too, we will have to rely on the sorcery of the Land Valuer-General.

Despite these difficulties, however, it is an idea that just won’t die. I’m not fully convinced either way, but perhaps South Africa’s “New Dawn” should explore the possibility of replacing the onerous tax burden on a creaking economy with a land value tax which is less harmful to economic activity. DM