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Follow Mauritius and Russia and adopt a simple, low, flat tax system for SA

11 August 2014   (0 Comments)
Posted by: Author: Eustace Davie
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Author: Eustace Davie (Free Market Foundation)

In a proposal to fundamentally change South Africa’s tax system, Free Market Foundation (FMF) director Eustace Davie said that the tax system should be low and flat and should follow the examples of Russia, Estonia, Mauritius and others in adopting a flat tax system. "South Africa is a developing country and needs to simplify its laws and administration to enable its citizens to understand and cope with them. A simple, low, flat tax system would reduce the current complexity but raise the same amount of revenue. This proposal was submitted to the Davis Tax commission in writing and presented to the Portfolio Committee in March 2014. Davie was speaking at an FMF media briefing on 6 August.

A Flat Tax System is a consumption tax whereby income is taxed only once, is simple, easy to understand, and radically reduces compliance costs. The benefits include reduced tax avoidance and evasion.

Davie said that Eastern European countries, most notably Russia and Estonia, have made their economies more competitive by adopting low, flat, tax rates. Russia cut its tax rate to a flat 13 per cent in 2001 and almost doubled its tax receipts as a percentage of GDP.

"Citizens should be allowed to concentrate on earning a living and not be forced to waste their time and hard-earned money dealing with time-consuming complexity. A three page tax act, a half-page tax return form, and 15% flat tax would be a great improvement,” he said.

Davie’s proposal borrows from US economists Robert Hall and Alvin Rabushka who spent more than 30 years presenting and refining a flat tax proposal for the USA. Their objective was to develop a tax system with incentives to encourage work, savings, investment and entreprenurial risk taking.

"This is what the SA economy needs. In addition, it would save huge amounts in direct and indirect compliance costs. It would also shift substantial funds from tax-avoidance to production. South Africa's tax system is not yet as complex as that of the USA, but unfortunately, it is moving in that direction,” Davie said.

The flat tax rate would apply to both businesses and individuals. While the half-page tax forms for individuals would differ from that of businesses, all businesses, regardless of size, would complete the same form. "This is the kind of simplicity we need in South Africa to accommodate the thousands of emerging entrepreneurs who have great difficulty in dealing with the current complexity,” he said.

"Tax equity can be maintained by exempting the poor from income tax. Exempting everyone from tax on the first part of income could do this. This way the poor pay zero and the wealthiest continue to pay the highest average rates.

"Adopting the Hall/Rabushka system would be fair, broaden the tax base, improve incentives to invest, make tax evasion more difficult, increase economic growth, raise local investment by encouraging capital formation, create new jobs by increasing real wages and improving incentives to work, reduce interest rates immediately, encourage taxpayers to be more honest, and attract foreign investment.

"Implementation, however, would likely face serious opposition from vested interests as there is a vast industry of professional advisors who earn high incomes from tax complexity.”

Davie concluded by saying that globalisation makes tax reform not only desirable but essential, especially for developing economies. Competition for financial and human capital requires countries to have attractive, competitive tax systems. "South Africa is not exempt and it is hoped that the Davis Tax Review Committee will put forward proposals for extensive simplification of the tax system and a reduction in tax rates.”

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