New municipal tax system: Legitimate?

01 June 2008 Robert W Vivian, University of the Witwatersrand

In the previous edition of FAnews, we raised the question whether the new municipal rates system was a legitimate cost recovery system and concluded that it was not. A government spokesperson confirmed that the new system was in fact a system of taxation. So the question now is whether this new system is legitimate as a system of taxation?

All so-called human rights which society currently enjoy come from revolts against state taxation, which had, in most cases, degenerated simply into state plunder. The Magna Carta came in 1215, the English Bill of Rights came after the Glorious Revolution, the culmination of the English Civil War, Constitutional Democracy came after the American War of Independence and the Rights of Mankind after the French Revolution.

Violation of tax principles

It was clear that if these violent reactions to taxation were to be avoided, a set of principles were needed. These were distilled by Adam Smith in 1776 as the four canons of taxation. For this article, we need consider only the first canon, that of equality of taxation, which was cast in stone in legislation all over the world from the 1700's onwards. By so doing, England avoided a revolution. Until recently the canons formed the basis of all tax legislation throughout the world but as the principles have been forgotten, so the legislation itself had violated the canons of taxation.

The requirement of the first canon can be summarised as follows:

* Taxation only on income
* Taxation must not encroach on the necessities of life
* A flat rate of taxation on income after the effect of VAT is taken into consideration
The new municipal system of taxation violates all of these requirements.

Taxation only on income

The new system is based on ownership and value of property, not income. Equality of taxation requires that tax fall equally on all persons in proportion to their ability to bear the burden of taxation, which is determined by income. The new municipal tax falls only on a very small proportion of the population: property owners. A widow living on a state pension of R850 pm, living in R1 500 000 a house, inherited from her husband in which they have lived their entire lives and was bought for R80 000 decades ago, pays the same tax as a childless couple living in the same valued house each earning R1 000 000 pa. It is clear that this new tax bears no relation to the ability of the owner of to bear the burden of the taxation. It violates the first and most fundamental principle of taxation. This example also illustrates that this new tax is not linked to income but to inflation of property prices. There is no basis, whatsoever, in principle or history to base taxation on ownership and value of property.

For taxation to fall on income, in accordance to the principle of ability to bear, there should only be one taxing authority in a state. That is one of the reasons why hitherto local authorities have not had the power to tax but only cost recovery powers. Where there has been a shortfall at local government level, starting in 1825 a system of specific grants from the central state was introduced, which later became a system of block grants. To have multiple taxing authorities will result as in each taking turns to tax the inhabitants until the inhabitants are forced to flee.

Taxation must not encroach on life's necessities

Since taxation may not encroach on the necessities of life, it is impossible for taxation to become a burden or for taxpayers to become indebted to the government for tax. Since this new tax violates this principle many may well become indebted to the local authority for taxes they cannot afford. It should be clear that many persons, in particular, pensioners and others living on fixed incomes will not be able to bear the cost of this new tax. Nor will large families who have greater expenses to contend with, compared with smaller families, be able to afford this new tax. They have less money available to pay this tax. This new tax, in violation to the first fundamental principle of taxation, will create tax debtors.

In terms of the first canon the deduction from gross income to determine the taxable income, must increase to recognise the increased cost of the necessities of life. This new property-based tax does not do this. It thus should be clear that many persons who own houses will not be able to afford this new tax. It may be that some can make an application for a reduction in taxes. This is in itself problematic. People who have endeavoured during their entire lives to pay their way will now have to be humiliated by applying for a rebate and disclose all their private affairs to municipal officials. This is a further invasion of the privacy of the individuals.

A consequence of not recognising the right for a deduction for the necessities of life may well be that many elderly persons will die indebted to the local authority which will be able to expropriate private property via the tax system.

A flat rate on income after provision for VAT

The provision of a flat rate has been violated since Lloyd George's 1909-10 budget when the system of progressive taxation was introduced. This new municipal tax is highly regressive, that is, it falls much more heavily on the poor than the wealthy. Since this new tax is based on ownership and property values and not income it also violates the above third requirement. Thus a person living on R850 pm will have a tax burden many times in excess of that person's total income. On the other hand, two people living on R2 000 000 pa in the same value home will be paying smaller fraction of their income.

The new municipal tax system as a tax

It should be clear that this new municipal tax system completely lacks legitimacy as a tax system. In light of this and our previous article, this new system thus lacks legitimacy as either a municipal rates or tax system. In other parts of the world where the municipal rates system became oppressive, inhabitants voted with their feet - they moved to more favourable tax locations.

The same will happen in South Africa as it becomes increasingly clear that in comparison to other countries, South Africa does not compare economically. With declining revenues, government expenditure will not decline and the government will increasingly bridge the gap by printing money and inflation will become increasingly apparent. In this case, increasing interest rates will not prevent inflation.

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