OECD Tax Plan Is Lunacy

The solution of the Organisation of Economic Co-operation and Development (OECD) to reduce the government’s budget deficit by raising taxes reflects astounding ignorance (The MercuryBusiness Report, August 26).

In the first place, given the ANC’s record of financial profligacy, additional revenue would simply be looted and misspent. But where the OECD’s view is particularly ignorant is in its failure to appreciate two economic fundamentals: the declining extent of the taxpayer base in South Africa and the role of tax reduction in the stimulation of economic growth.

Whereas until 2012 the taxpayer base grew by about 7%, since then it has stagnated and contracted by 2,1%. Personal income tax, which contributes 40% of the tax revenue, is derived from only 9% of the population. On closer examination, one-fifth of that 9% actually contributes three-quarters of that revenue.

Thus, South Africa’s tax base is very tenuously placed. It is also being eroded as the contributions of skilled citizens are lost through emigration. On that basis alone, it is a no-brainer to call for taxes to be raised.

Significantly in making that call, the acting chief economist of the OECD, Dr Alvaro Santos Pereira, contradicts the policy he advocated in 2013 when he was minister of Economic Development in the Portuguese government. With Portugal facing its worst recession since the 1970s, Pereira advocated lowering taxes to stimulate growth and make investment more attractive (see: Reuters, April 24, 2013).

President Trump’s tax reductions proved the maxim that less is more and merit emulation in South Africa. Trump slashed corporate taxes from 35% to 21%. For individuals, lower rates and higher standard deductions qualified 111,8 million out of 150 million taxpayers for refunds which averaged $2,869 in 2020. More disposable income meant economic growth and lower unemployment.

It is, therefore, absolute lunacy for Dr Pereira’s colleague, the OECD’s acting head of country studies, Dr Isabell  Koske, to advocate the reduction of tax allowances, deductions and tax relief in the belief that such measures would increase tax collection. Even more absurd is her suggestion that the standard VAT rate should be raised “slightly’ while compensating low-income households through transfers.

This fixation that more funding should be allocated for the relief of social distress has already proved a failure. In 1994 there were 3,6 million unemployed – mostly as a result of the ANC’s sabotage of the economy through wild strikes, endless protests and their advocacy of disinvestment. Before the unscientific lockdowns, unemployment had exceeded 10 million. Subsidising poverty does not cure poverty. It creates more of it because it treats the symptoms and is not the cause of unemployment. It’s like dispensing aspirin for haemorrhaging.

People want dignity,  not just compassion. Being employed and self-supporting restores dignity. Dependence on social grants diminishes initiative and enterprise while negating the skills of the unemployed.

The cure for South Africa’s tragic unemployment rate has long been obvious: scrap the inflexible labour laws coupled with the racially discriminatory and prescriptive B-BBEE and implement Trump’s tax reforms.

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