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CloistersCloisters 10 September 2006


 

New Economics Tax Forms

 

3: NEW TAXES

by Margaret Legum

Three decades of belief in limited government has them apologetic about taxation, the cutting of which has become their most acclaimed achievement. Hardly surprising. If we started from scratch is it imaginable that the current way of collecting taxes would be considered? Those forms! Regulations that crush small business, reduce individuals to criminality, and require government and business to employ fleets of expensive staff. Huge incentives for evasion - and VAT that raises all prices and cuts disposable income.

What are taxes for?

We need new kinds of taxes. Between them they must achieve two purposes. They must raise sufficient revenue. And they must influence patterns of consumption, via the market price mechanism, that will encourage socially benign activity and discourage destructive behaviour.

Transaction taxesTransaction

‘New’ economics proposes that revenue raising can best be done through transaction taxes. They could raise enough revenue, relatively painlessly, to begin replacing inequality and poverty with economic democracy and justice. They are a new idea – the dedicated life’s work of Johannesburg business man, Bob Shambrook - because they rely on sophisticated electronic payments systems that are only recently available. A transaction tax takes a small bite out of the value of all transactions that go through banks. It can be very small because nothing escapes it: the net is very wide. It is levied on both sides of all transactions. It is collected electronically by the banks, and dispatched to the Ministry of Finance in a steady stream throughout the year, so there is no need for a collection agency.

If South Africa wanted to raise enough revenue to replace all other taxes, we would need to levy only 5 cents in every R100 – given the economic activity represented by transactions through banks. That is because the annual value of bank transaction in SA is about R44 trillion. So if we all paid 0.5% of everything we paid or received through a bank, we would never again have to fill in a tax form – either personally or as a business. We would never again have to pay the 14% VAT that is added to what we buy.

And if we decided to introduce something new - free schooling for everyone, or a basic income grant, or care for everyone infected or affected by AIDS, we could levy an extra, say, 0.1% - instantly increasing revenue by 20%. Compare that one cent to the flat rates, running into several rands, that banks charge routinely for each small service.

The reason why existing taxes raise so much less than transaction taxes, although they are so much higher, is that they are levied on only a part of our economic activity – that part that constitutes incomes and profits. A large part of the nation’s economic activity is not counted. Businesses spend millions paying experts to maximise their ‘expenses’ to reduce their taxes; and individuals are given incentives to minimise their non-taxable income. Tax evasion and avoidance are built into the system. But if the tax is applied to every transaction it can be a tiny proportion to bring in the same revenue. It is impossible to evade.

The benefits

Total revenue apart, here are some advantages of using transaction taxes to replace others.

  • Governments would never have to borrow from banks, or taxpayers pay the interest.

  • There is virtually no expense involved in collecting the tax – at either end.

  • The levy can be altered by changing a computer setting, making it highly responsive to revenue needs.

  • Everything traded would be cheaper by the value of VAT, so enlarging the market: this could attract foreign investment, as would the absence of corporate taxes.

  • Enterprise could concentrate on real efficiency, rather than enlarging business ‘losses’ or ‘expenses’ to minimise tax. This would enhance business ethics.

  • The taxation of labour would end, making employment cheaper.

Banks to CashWhy would these taxes not lead to a flight from banks into cash? First, less than 5% of our money is in the form of cash: that would run out very quickly. Second, cash would be taxed as it comes and goes from banks: the only way to avoid paying it is to do without a bank account altogether. Is that practical today? Third, robbers would have a field day.

So, who would lose?

Who would lose? Tax accountants and lawyers, as well as the employees of SARS / Inland Revenue would have to find more constructive employment for their highly desirable skills. The banks would lose their ‘free lunch’ in the form of interest on government borrowing; but the economy would benefit by releasing loan funds. And people, who now benefit from pre-tax perks, would have to pay for their own entertainment from their own enlarged incomes.

People who transact the most – large corporations and government - would pay the most: that is the purpose of all progressive taxation. Business would factor the tax into their costs, and its benefits would keep them competitive. They are dependent on an enlarged government capacity in terms of human and infrastructure development.

A phased introduction

A transaction tax should be introduced progressively, and other taxes phased out at the same time to demonstrate the compensatory advantages. Thus VAT could be ended, with immediate benefit, by the introduction of a transaction tax of about 0.67%. Another new levy of 0.0007% would raise enough for a Basic Income Grant, whose effects would be highly noticeable. That would establish how the system works – the flow of funds, the exact value of transactions, the effects on people’s behaviour. After that there will probably be public pressure to end other taxes and complete the transition to transaction taxes.

Other new economics tax proposals are more familiar – often described as Green or ‘sin’ taxes. Their underlying principle is that we should tax ‘bads’ – smoking, polluting, using finite resources - and reward ‘goods’, like clean fuels, organic food, local livelihoods. These taxes would use the market to make ‘goods’ relatively cheaper and ‘bads’ more expensive, and to internalise the full costs of destructive activity into the cost of the product. So if you were prepared to pay the full costs, including pollution taxes, you could fly French croissants to the desert for breakfast.

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