South Africans pay higher taxes as a percentage of GDP than Australians and Americans. While their Tax Freedom Day (TFD) fell on 6 April and 16 April 2011, respectively, SA’s will fall on 2 May. The citizens of those countries have more economic freedom than we do because they spend less of the year working to pay their taxes.
This year, South Africans will start working for themselves eight days earlier than last year’s 10 May as a result of the recession. As a percentage of GDP, we will earn less money and pay lower taxes, but, unfortunately, that does not mean that government will spend less. They are going to borrow and spend more, which will mean all South Africans will be faced with higher taxes in future to pay the interest on these borrowings and to repay the loans.”
How does government get its hands on the finance it needs? Through income tax, VAT, fuel tax and the host of other taxes we all have to pay. To determine the real impact of all these taxes on any one individual is very difficult, but the TFD measure was developed to try and give citizens some idea of how much of the nation’s earnings government takes from them in taxes. In SA’s case, the nation will spend 121 days, or 33.2% of their time, working to pay their taxes and only on 2 May, the 122nd day of the year, will they be able to start working for themselves.
Of course, taxes are spread throughout the year and a chunk of every day’s earnings goes in taxes. We nevertheless gain a useful perspective on taxes when we calculate an overall average tax burden by converting into days and months the time that a nation spends on earning money with which to pay taxes. It is a sobering thought to know that we have only 244 days or 66.8% of the year left to work to pay all our other expenses and to try and put away money for retirement.
TFD gives us a macro-economic picture of taxes, taxpayers and the economy. To determine your own personal TFD add up the total taxes you pay in a calendar year (including the hidden taxes that are contained in the purchase prices of most things you buy), divide the number by your total income for the year, multiply by 365 days (366 in a leap-year) and add 1 day. Everyone’s earnings are not the same and the tax burden is not spread evenly. The top 1% of American taxpayers, for instance, pays 40% of all US taxes and the top 1% of Australian taxpayers pays 18.5% of Australian taxes. In both cases we would need to know their total incomes in order to calculate their collective TFDs. Similar figures for SA are not readily available but according to SARS 2009 figures, 52,446 taxpayers (1.5% of the total) earned more that R1m each and paid 24.5% of all income taxes collected from individuals.
Economists tend to disagree over the level of taxes that individuals should pay, who should pay the taxes, what effects taxes have on their lives, and what form taxes should take. US economist Arthur Laffer became well known for his famous graph (the Laffer Curve) which suggested that there is a tax rate level beyond which total taxes tend to decline rather than increase when the rate is raised. According to this theory, cranking up the taxes on the highest-earning taxpayers can be counter-productive, while reducing the rates can result in increased tax income for the state. Ronald Reagan’s administration proved the accuracy of this prediction when it slashed tax rates and ended up with more revenue.
Numerous reasons are put forward for the Laffer Curve phenomenon; higher after-tax income increases incentives and productivity; money saved from lower taxes is invested to increase production, and taxpayers spend less time on tax avoidance schemes and more on growing their incomes. Whatever the reason, some governments have implemented low-tax regimes with positive results. Unfortunately, the lessons learned are soon forgotten and calls for higher tax rates are once again making the headlines.
TFD for the UK this year has been calculated as 30 May, 28 days later than SA. Other TFDs due to occur after SA’s as indicated by their 2010 TFD dates are Croatia (10 June), Israel (22 June), Poland (23 June), and Sweden (20 July). Swedish people spend 200 days (55% of the year) working to pay their taxes and have only 165 days to work for themselves. At the other end of the scale is Mauritius. This small island nation is the envy of most taxpayer nations. Its TFD fell on 22 March as a result of a deliberate effort to cut back taxes (15% tax rate for individuals and companies) and to make it more investment friendly. It is 9th on the 2010 Economic Freedom of the World index compared to SA’s 82nd, and 20th on the World Bank’s Ease of Doing Business index, with SA at 32nd.
According to FMF Executive Director, Leon Louw, “A deliberate effort on the part of government to give SA an earlier TFD would make the country more business and investment friendly, increase disposable incomes, savings and investment (including foreign direct investment), increase economic growth, and reduce unemployment.”
By Garth Zietsman
Free Market Foundation, South Africa.