Tax committee should look at wastage of funds
26 August 2014
Posted by: Author: Pietman Roos
Author: Pietman Roos (South African Chamber of Commerce and Industry)
The public wage bill has become a significant fiscal liability, writes Pietman Roos.
Over the past year the Davis Tax Committee (DTC) has been preparing submissions to the minister of finance on possible changes to the tax law. The broader public remains relatively unaware of the work and more so the potential of its impact, although the committee has been at pains to be transparent and accommodating in interactions with stakeholders.
At a briefing, chairman Judge Dennis Davis explained that one of the salient themes that emerged from public consultations was the frustration that public funds were not spent efficiently. Some were even willing to contribute more to the fiscus on condition that the funds did not end up in the pocket of a corrupt public servant.
The argument is hardly new, but has over time become more important to a citizenry inundated with reports of wasted public funds.
Although the mandate of the committee is to look at specific tax items like SME tax administration, in other words the revenue side of fiscal policy, the greater contribution of the committee could be to offer solutions towards mitigating the risk of wasted public funds.
On face value this focus would fall squarely outside its mandate because it deals with issues of public spending and governance, but a holistic assessment of taxation would imply that some attention should be given to mitigating the wastage of public funds.
A literal interpretation of its mandate would allow for an interrogation of waste mitigation.
The official mandate is to assess South Africa’s tax policy frame-work and its role in supporting, among others, fiscal sustainability, to paraphrase the National Treasury statement at the DTC’s initiation.
Fiscal sustainability is closely linked with ensuring tax compliance specifically, but more broadly fostering a culture of tax morality. If the citizenry become increasingly reluctant to pay their tax contributions then the risk of tax evasion also increases, and the tangible impact of wasted public funds erodes tax morality.
The general frustration with the wastage of public funds has manifested in specific tax protests. The continued popular protest against the e-toll system in Gauteng is one example. Most motorists would arguably concede to paying e-tolls if not for an existing fuel levy and the recurring evidence of wasted billions in taxpayer funds, billions that could’ve funded the Gauteng Freeway Improvement Project (GFIP).
The risk is that specific instances of tax protests against new forms of taxation may become an entrenched attitude and spread to a general unwillingness to contribute to existing taxes. Once that happens the concerns around fiscal sustainability will be overshadowed by threats to political stability.
To be true to their mandate, the committee needs to seriously consider revenue-side mechanisms that can work towards mitigating public funds wastage. On a more instrumental level, the question is how an item of tax law can be designed to reduce public funds wastage.
A possible answer is extending tax exemptions for donations to public causes. South African law allows for some measure of tax exemptions but there is certainly an appetite among the broader private sector for further charitable donations. There is evidence of widespread corporate social investments with funds and resources committed well in excess of any tax or regulatory benefit.
Corporate South Africa has steadily taken on a fair share in supporting communities, and many private citizens are active in supporting community-centred organisations without even thinking of tabulating their time and resource contributions for tax benefits.
Extending tax exemptions for charitable donations would emphasise two important principles that have become part of the societal consensus: that tax revenue should support the community as opposed to propping up a bureaucracy and that private citizens can play an active part in supporting their community.
Allowing a small rural company to deduct a large share of its tax liability against donations to keep the local primary school going avoids multiple levels of bureaucracy and makes visible the connection between the societal contributions and the positive impact on a community. This is a powerful method to connect otherwise apathetic and frustrated taxpayers with the beneficiaries of their contributions.
Expanding tax deductibles would not lead to less funds for public items, it is merely a way to optimise contributions and keep in mind that the effective tax rate will remain unchanged.
Anecdotal evidence suggests that a tangible impact from contributions will often lead to further voluntary contributions to a school, hospital or police station out of a reinforced sense of community. Private sector contributions to public causes are, in fact, likely to increase.
The beneficiaries of donations is a design issue and rules can be created to ensure certain institutions are not overfunded to the detriment of others.
But it is also about rewarding those institutions or organisations that deliver on their mandate, as opposed to creating ever more complex levels of bureaucracy.
It’s also not to say that tax contributions to the central government will cease completely; democracy implies giving national representatives the power to formulate and execute national policy.
But democracy also includes the concept of direct community participation and a degree of local and regional autonomy.
The best way to acknowledge these principles is by allowing citizens greater power in apportioning their contributions.
South Africa is in the unique and unenviable scenario of burgeoning public service employment while the public service is less-than-optimal.
According to Statistics SA figures, public sector employment has grown by a staggering 26 percent since 2008, compared to the total employment growth of 4 percent over the same period.
The public sector is the biggest employer with 3.4 million employees, having surpassed trade, and effectively employs almost a quarter of all employed individuals in South Africa. It is, therefore, no surprise that the public wage bill has become a significant fiscal liability.
Although to many people, the issue of tax laws and changes to fiscal policy may seem as exciting as watching paint dry, it is important to realise that the Davis committee has the power to change the course of South Africa’s long-term development.
The question is whether it will contain its comments to more technical proposals for gradual change, or venture elegant solutions to several important societal challenges.
This article first appeared on iol.co.za.