Municipal service charges as a Masakhane tax

01 August 2008 Robert W Vivian, University of the Witwatersrand

The new municipal services 'charges' for water, electricity, sewage and refuse removal are not a system of charges but largely more taxes.

In the previous two editions of FAnews, we discovered that the new municipal rate system is not a cost recovery system, but in fact a tax system that also lacks legitimacy. The charges for municipal services are supposed to recover the cost of services, but this too has now been converted largely into a tax.

This form of taxation is largely unnoticed. It does not appear on the government books as a tax and it is thus not accounted for. I call it the Masakhane Tax, named after the failed Operation Masakhane, which led the government to discover it.

Taxing those who do pay

It will be recalled that before the ANC came into power it encouraged residents of townships not to pay municipal levies in order to make the country ungovernable. It largely succeeded in getting people not to pay municipal levies and so a culture of non-payment developed. Once in power, the government of course encouraged everyone to start paying the municipal levies.

Unsurprisingly, this was unsuccessful, so Operation Masakhane was launched with the objective of getting people to pay. This was also unsuccessful. The government then discovered what I call the Masakhane tax. It was decided to allow some consumers who do not want to pay, not pay, and force those who do pay, to pay more, to subsidise those who do not pay. Thus, for example, the people in Sandton who did pay their municipal rates, had their rates increased in some cases by 400%, which led to the famous, unsuccessful Sandton Rates Boycott. Since then, this tax is now widely applied in a variety of areas such as school fees, medical aid and so on.

The latest structure of the municipal 'charges' incorporate a substantial Masakhane tax component. It may be the major component, which means that the so-called service charges are more correctly a tax.

Contrary to market practice

Compare what happens to prices in a competitive market. Suppliers compete for business and customers who are generally price conscious will buy from the supplier who supplies the product at the lowest price. Prices are, of course, constrained by costs. Suppliers cannot supply indefinitely at a price which exceeds costs.

Costs on the other hand embody two elements: fixed and variable costs. As consumption increases, the fixed costs are recovered and the variable costs are left. In the end the lowest possible price that a supplier can charge is at the marginal increase in costs. This indicates that as the consumption increases, so the price decreases until it reaches the marginal cost of providing the increasing consumption. As consumption increases, one would expect costs to decrease and in competitive markets, so does the price.

Service charges as Masakhane tax

The new municipal service 'charges' do exactly the opposite - the rate (price) increases with consumption. The profit made by the municipality per consumer increases as the consumption of that consumer increases. This profit is then used to subsidise the consumers with lower consumption. It may well be that consumers at the lower consumption are paying a price below cost. The excess profit paid by the consumers with higher consumption is the Masakhane tax.

Widespread use

The use of the Masakhane tax is not confined to municipalities - it has now become widespread. The electricity regulator applied the same principle in approving the recent Eskom increases. The increase for lower consumption consumers will be 14%, higher consumption consumers will pay nearly 28%. The difference between the two is 100%, providing some idea of the extent of the Masakhane tax component.

Double taxation

A number of observations should be made about this tax. Firstly, in nature it is a form of consumption tax, an indirect tax. The first objection which arises from this is that it is a form of double taxation. Two forms of taxation have always existed, direct (income tax) and indirect taxes (VAT). Gladstone, the British Prime Minister, called these two forms of taxes "the two ugly sisters". Strictly speaking once income tax was introduced in the late 1700s, indirect taxes should have been abolished and indeed they declined in application. Indirect taxes are paid out of after tax money and when used with income tax, they become double taxation. This is one of the reasons why it took so long for GST (General Sales Tax) to be introduced.

When income tax was first introduced everyone knew that indirect taxes were to be reduced - the one being the substitution of the other. Governments had to wait for a generation or so for the taxpayers to forget the trade-off, before GST could be introduced. When it was introduced it was on the back of one of those perennial tax lies, 'It is being introduced to increase the tax base.' It was nothing of the sort. It was double taxation. The same people were being taxed twice.

Triple tax?

So the first objection to the massive increase in municipal 'charges' is that taxpayers are actually paying the Masakhane tax twice. Firstly, an amount is paid to the central government via the income tax system and secondly to the municipality as a Masakhane tax. Since a large portion of municipal charges now consist of a tax, services charges should be exempt from income tax.

A second objection is that the service charge is treated as a service charge and not a tax and VAT is levied on the 'service' charge. VAT as already explained, is already double taxation. VAT will now be levied on the Masakhane tax component as well. This thus constitutes at least triple tax; a tax upon a tax upon a tax.

A third objection, the most well-known objection to a consumption tax - is that it falls heaviest upon the poor and in this case, since the poor are being subsidised, it does not fall upon them but the wage earning middle class. Taxes are increasingly falling upon the middle class wage earner. In the end there will be very little difference between the poor and the working middle class. The working middle class may earn more money, but most of that disappears in some form of taxation. I have previously argued that South Africa is producing a new class of poor - the working person, especially the single parent.

It should thus be clear that the so-called now municipal 'charges' consist largely of a new form of tax.

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