South Africa’s tax laws were designed for a high-income society – a result of a long history of the country accommodating a small, wealthy economy, and a large, poor one. But for a country with tens of millions being either unemployed or receiving very little income, being one of the world’s highest-taxed states does not make sense, particularly when small business growth is so crucially important to our economic future.
This is according to the authors of Laws Affecting Small Business: Tax, which is part of a series of research booklets published by the Free Market Foundation. The LASB booklets cover eight areas of government legislation and regulation that harms and hinders the establishment and growth of small enterprises in South Africa.
One of the historical South Africans I admire most was Jan Hendrik Hofmeyr, who served as Deputy Prime Minister and Minister of Finance (among many other portfolios in his young life) under General Jan Christiaan Smuts. Hofmeyr was the leader of South Africa’s liberal movement and the most senior person in government service who strived for non-racialism and personal and economic freedom for all.
Unfortunately, his stint as Minister of Finance came during World War II, which meant Joe Public had to be burdened by significant wartime taxes to fund South Africa’s participation in the conflict. Jan Hofmeyr, the face of these taxes, acquired the not-so-endearing nickname of ‘Jan Taks’ in the opposition Afrikaans press.
The nickname has stuck, outliving Hofmeyr and still being used occasionally today among the Afrikaans (and sometimes English) commentariat to refer to the South African Revenue Service.
With the painful price inflation South Africans have experienced in the last few months, the tax burden is felt more acutely than ever before. By 2019, South Africa was already one of the ten most highly taxed societies in the world. Small businesses cannot be expected to thrive when a huge chunk of their savings and income has to be paid over to an inept and corrupt civil service.
Indeed, the notion that the government provides an environment for success and that South Africans must therefore contribute to it financially, is not in touch with the reality most South Africans experience daily. Blackouts, absent police, dilapidated roads, unresponsive municipalities, a lack of water – the list goes on – indicates, clearly, that no such ‘environment’ has been, or is being, created.
South African taxpayers today understand that we are simply funding corruption and mis-expenditure on vanity projects.
The South African government’s expenditure is excessive, and studies show that while the government continues to eat up such a large percentage of GDP, economic growth would be hindered. A necessary reduction in government spending will make tax relief possible, in turn incentivising more savings, investment, and economic growth, particularly among small businesses.
Tax laws are also infamously complex, not only in South Africa but around the world. Small businesses in disadvantaged communities suffer the most from this, as their owners are often not well-equipped to familiarise themselves with legalese nor can they afford an expensive legal advisor to do so on their behalf. The result is non-compliance.
The LASB: Tax authors make very specific recommendations on how to adapt South Africa’s tax regime to be beneficial to small business, including:
- Reducing government spending to less than 25% of GDP. This would involve identifying core government functions and abandoning peripheral matters, argue the authors. Jettisoning the departments of Sports and Recreation, Arts and Culture, and the hopelessly misnamed Department of Small Business Development, would be good examples of places where government expenditure can be cut.
- Adopting a new, simplified Income Tax Act for the lowest bracket of income taxpayers. Under this Act, a tax return should be no more than one page, and its threshold (before income tax kicks in) should be relatively high.
- Allowing all small firms to deduct all capital equipment expenditure from taxable income.
- Exempting businesses with turnovers of less than R2,000,000 from having to register for value-added tax. Compliance with the VAT Act is infamously complicated, and it is unreasonable to expect small businesses to spend time, effort, and money on doing so.
- Granting small companies and partnerships that consist of natural persons a tax deduction.
The LASB booklets represent one-third of the Free Market Foundation’s book, Radical Economic Transformation: The Legal Route to Economic Freedom, which proposes a comprehensive reform package, including these that relate to taxes, that will get the South African economy prospering.
As statistician Garth Zietsman wrote recently for the Free Market Foundation:
“Government revenue is undeserved and precarious. By international standards South Africa combines an extremely high tax burden for countries with our GDP with an exceptionally small tax base, and government seems intent on chasing away its largest source of revenue.”
My admiration of Jan Hofmeyr aside, it is time for Jan Tax to finally retire. The government’s preoccupation with its own coffers must be replaced with a commitment to seeing ordinary South Africans and businesses keep more of what they earn so they may invest in themselves, their families, and their communities, thus leading to economic growth and prosperity in the long-run.