South Africa’s 2012 Tax Freedom Day – Saturday, 5 May

The principal meaning of freedom is to have the reward of one’s own industry. However, taxes take some of that reward away from people. Through one kind of tax or another, government takes a bit out of everyone’s earnings. This means everyone is forced to devote a certain part of their time to working for government.

We do not pay taxes as a voluntary contribution out of surplus earnings. No, we are compelled to pay them first. Only out of what is left can we buy necessities like food, clothing, transport and shelter, provide for health care and education, and, if we are fortunate and there is something left, purchase some of those desires that make life broader and more abundant.

On Saturday, 5 May, the people of South Africa start to work for themselves. From 1 January until then they have been working for the country, providing the funding needed to pay the cost of government for one year. This year, tax freedom day is three days later than it was last year because government spending, the deficit and government debt continue to increase. It will probably be even later next year as taxes will have to rise to fund more government expenditure.

Apart from a principal aspect of freedom being eroded, why should we concern ourselves with the level of government revenue and spending? Well, virtually every measure of welfare of a country’s people depends crucially on the prosperity of that country. Several studies in the US and Europe consistently show that every 10% increase in total government spending as a percentage of GDP reduces the country’s economic growth rate by around 0.8% and increases the unemployment rate by around 3.6%. Other studies find that reducing government consumption by 1% immediately increases investment by 0.5% - increasing to 2.7% after 5 years. Estimates of optimum total government spending for maximal productivity place it at 20-23% of GDP.

Why do high government expenditure and tax rates have this effect? In a nutshell, high marginal tax rates reduce the incentives for entrepreneurs to risk their capital or sacrifice their time and energy to earn higher incomes, and they interfere with the ability of individuals to pursue their goals because they result in less disposable incomes. Less disposable income means less saving; less saving means less capital formation; less capital formation means lower labour productivity, and lower labour productivity means lower real wages.

Government spending greater than 23% of GDP is a luxury countries cannot afford. We need to be very concerned because South Africa’s government spending is at 37%, 14% above the critical level. By international standards, our high rate of government spending –places us among the top six worst in the world for our level of development. Even worse, government consumption spending accounts for most of the bad effects of government costs on the economy and our government is increasingly shifting toward that sort of spending rather than on core functions and capital projects.

If we were to reduce our government spending (and tax take) to optimum levels – about a third less than it is now – we would reduce unemployment by 5% (242,000 jobs) while increasing the investment rate by 38% and the growth rate by around 1.7% - reducing the time to double per capita incomes from 36 to about 20 years. Potential huge benefits for everyone - or huge losses if we carry on the way we have been doing.

Government needs to focus on those core functions that enable and support prosperity. These core functions are largely to ensure that the rule of law is respected and enforced, that the country is kept safe from foreign aggression and its seas free from foreign plunder, the currency remains sound, and that there are no barriers to trade or entry into the marketplace. From the point of view of giving South Africa the best chance of becoming prosperous, anything else government currently does is excessive. One of the greatest things that can be done for the country and its people is to economise on government and give the people back the freedom to own the rewards of their industry and to choose how to spend their money.

AUTHOR Garth Zietsman is a consulting statistician. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 1 May 2012