Tax reform is vital in order to achieve growth objectives
Since 1994, there have been extensive debates about the dire need for education reform, health reform and retirement reform; but we have only touched on the issue of tax reform. However, there is a desperate need for this to take place if the country is going to come anywhere near realising the targets set out by the National Development Plan.
The purpose behind this would be creating an enabling environment which would go a long way in realising the goal of the ruling party to increase employment from 11 million jobs to 24 million jobs by 2030.
Working towards a common goal
If one looks at the current South African job market, there is very little interaction between three of the country's biggest role players. Government, labour unions and big business often have different objectives to achieve the common goal of the African National Congress (ANC). It is a traditional case of too many cooks spoiling the broth.
The effect of this is being felt by the consumer. Government needs revenue in order to create jobs, but with growth levels of between 2% and 3%, it needs to turn to a soft target in order to ensure that its ambitions do not fall apart at the seams. Unfortunately this is the consumer.
Michael Dingley, National Head of Taxation Services at Mazars, points out that the fact that 1.4 million people are paying 80% of the country's tax, is simply not sustainable and he questions how much more the taxpayer can actually take.
This is the biggest challenge facing South Africa at the moment. There is a desperate need for job creation, which can only be achieved through the creation of an enabling environment that involves new business creation. And because of the fragility of public sector companies, especially parastatals such as Eskom, Transnet and the South African Broadcasting Corporation, the majority of this business needs to come from the private sector.
"Because of this, a social pact between government, labour unions and big business needs to be developed. Industry leaders need to sit down and come to terms with the fact that if South Africa wants to reclaim its place as one of the world's fastest growing economies, radical changes need to occur."
Differing views on company tax
Auditing giant PriceWaterhouse Coopers (PWC) have been very outspoken on this issue and have highlighted the need to drop the company tax rate from 28%. This is a strategy which has been used to great effect internationally, and the result is increased foreign direct investment (FDI) in key markets.
The problem that government faces with this, is if it drops the company tax rate, and FDI is encouraged, does it have the infrastructure backbone to back up its assurances that South Africa is open for business. It would be interesting to see if an international company would have the same level of patience with Eskom during its load shedding programme than the South African public was forced to have.
It's like being caught between a rock and a hard place, but Dingley points out that there is a way around this.
"As opposed to decreasing the level of company tax, increase it. But then offer incentives to companies who create a certain amount of jobs. This would effectively decrease the effective rate. The more jobs you create, the more incentives you receive. This would achieve a double objective of decreasing company tax while making strides towards achieving governments employment targets," says Dingley.
Relook the NDP and be more realistic
Because of the slow rate of growth that has been achieved since 2009, governments has been forced to relook its growth targets, which are a far cry from the 6% outlines in the NDP.
Dingley points out that Gordhan has been outspoken about the fact that during times of good growth, the country should have a budget surplus which would fund the times of slow growth where the country has a budget deficit.
However, something serious needs to be done to resolve the current situation as the country has had three consecutive years where it has been experiencing a deficit.
"The problem with this is twofold. Firstly, each year we have a deficit, it goes towards the accumulated deficit, this needs to be funded by borrowings. And secondly, when rating agencies see that a country is not able to achieve the growth objectives that it set out, they downgrade the country. This makes borrowing difficult as the rate of borrowing goes up and interest is charged at a high level," says Dingley.
Perhaps government should approach the NPD growth targets in the same way it is approaching its employment targets, obviously with a different timeline. Perhaps building towards a growth target of 6% as employment increases would provide rating agencies with the faith needed to start upgrading the country's economy.
Be fair to the people
Reforming the tax framework will not only help government achieve its growth objectives, it will also help it be fair to the public.
When the ANC took over in 2004, two of its main promises was that there would be an equitable distribution of wealth and that there would be effective service delivery to the public. While there is a growing middle class, there is a large portion of the country which is impoverished and it is these communities which are also not receiving the services promised to them by government.
The reason for this is that government may simply not have that much money to spend in these areas. Dingley adds that these are two of the important areas which tax is traditionally used for. If tax is being used to fund an accumulated deficit, less is available to distribute wealth and provide essential services?
Another area where government is unfortunately falling short is on the development and maintenance of infrastructure. The early March load shedding programme proved this and the fact that government is struggling to deliver its Medupi power station on time is further evidence of this.
These are the main areas that taxes are supposed to be used for. Perhaps reform and moving towards a system that Dingley suggests will go a long way in achieving this?
Editor's Thoughts:
The Davis Committee has been established to look at the current tax framework and to decide whether it is fair, sustainable and NDP driven. What is certain is that the consumer is currently taxed to the limit. Does this open the door for companies to become the new soft target area for government? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
Mr Dingley's woolly thinking with regard to increasing company tax and then offering incentives for employment may have unintended consequences - it might well encourage a phenomenon of 'paid loitering' when largely unneccesary additional staff are hired to fill incentive 'quotas'.
And what happens if and when downsizing is required? Severance costs would probably be punitive. Report Abuse