Author: Mike Schussler Source: Moneyweb
Budget time always brings some alternatives and much debate across the country. But a little known fact needs to be put out in the public mind.
Only 4 out of every 10 adults are employed in South Africa. This is much lower than the 6.5/10 for the rest of the world. The local economy therefore has too few jobs and employers are hard to find.
South Africa’s economy ranks within the largest 25 economies in the world and is strategically very important. The economy should therefore have a better track record to attract long-term fixed investment employers.
Unfortunately, our track record is very poor. A surprising fact may have played a very big role in the non-investment in the country. What is this surprising fact? South Africa’s companies pay the second highest effective tax rate among the biggest 60 economies in the world. (2009/2010 data from Tax statistics from National Treasury).
Yet South Africa has one of the smallest tax bases in the world and one of the countries with the fewest number of employers and companies paying tax.
Over the past 8 years, the average effective tax rate in developed countries has been less than half of what South African companies pay.
Effective company tax rates are often compared across countries when companies have to decide where to expand to. The effective tax rate has very little to do with the corporate tax rates. Most companies today understand that is a political sleight of hand as many exemptions and write-off methods exist which lower the effective tax rate. It has to do with actual tax ratio as a percentage of the size of the market.
The OECD has kept very good tax statistics for some years now as do some other countries and it makes for eye popping reading – at least for South Africans.
OECD data released at the end of 2011 shows that the average tax payment as a percentage of GDP in the developed world is around 3% (2.8% in 2009). The highest effective corporate tax to GDP ratio in 2010 was in Norway, where it was 9.7%.
What is SA’s rate? The SA Effective tax rate is 6,2% or twice the rate of the developed world average, which one would expect would be higher than a developing country such as South Africa and certainly a country without a large tax base. This has been the case for the last eight years at least. In essence South Africa is the total opposite of Greece where companies actual pay a huge amount of tax and then also get blamed for all the world’s ills.
The Government has been complaining that the local economy is getting too few green field projects that really create jobs. The most notable one we have received was in the motoring industry, but at a massive cost as the incentives and protection for the industry comes at a cost of nearly 1% of GDP.
Simple fact is that South Africa is chasing away foreign investment not only through rhetoric, but also with the high effective tax rate.
I have personally told the DTI that taxes are a big factor, but the officials did not welcome this view.
The fact that South Africa is one of only three countries that has had a consistent effective corporate tax rate of over 5% of GDP over the last eight years shows that the government is not serious to attract foreign investment.
In effect this strategy results in the perpetuation of poverty.
South Africa is the only developing country that I could find whose effective corporate tax rate is well above 5%. The average among most developing countries seems to be between 1% and 2% of GDP. This illustrates the pressure on firms and entrepreneurs to invest and to create employment.
Added to the high effective corporate taxes are other high rates for basic services such as electricity, water and property rates. Local businesses also spend more than most other countries on education of employees.
Effects of high effective corporate taxes
The most tangible effect of South Africa’s high effective tax rate is the absence of greenfield projects by foreign or local companies.
As a foreign businessman once told me – “you (South Africans) seem to believe that anti-business rhetoric and high taxes are not enough punishment (and therefore) you want even more punishment in the form of unemployment.” This will therefore mean that South Africa will continue to find significant foreign investment.
This fact is highlighted by the UNCTAD world investment report that shows that although South Africa has the biggest economy in Africa, it is only the tenth most popular investment destination.
The reality is that foreign companies do not want to do business in a country where too much of its profits go to the government in the form of taxes. Investment decisions are made on profit ratios. It is as simple as that.
Another effect is that the talk of nationalization is just hot air. If companies pay up to 8% of GDP into different forms of taxes, how the hell are you going to pay for nationalizing them? The act of nationalization will result in the government losing a third of its tax income. Unless you want welfare dependency to go cold turkey in a matter of months and the resultant political riots you had better leave all talk of nationalization.
A third factor is that business will have a bigger voice in the future. Apart from the high effective tax rate, businesses are required to adhere to labourious labour and empowerment laws.
I can tell you that if a country has ever fewer businesses in the bigger scheme of things they will have an ever bigger say as they are relied on more and more to pay the government machine. This is simple demand (Government has a demand for taxes to pay welfare cheques and salaries) and supply (The number of companies able to create wealth who can pay taxes).
In countries with only a few big firms as big employers as is the case in some developing countries, it is noticeable that in many (not all) effective corporate taxes are closer to 0% of GDP while published nominal corporate tax rates are often 50% or more.
If this continues will these companies and not the people then choose the president and his ministers or even the policies. Relying on too few companies is not good for democracy either. Maybe that also could be a lesson
The Alternative title could have been: Honey I sold the country and now the bastards want to let me go!
While SARS has become more effective, a high effective tax rate constrains companies to investment meaningful amounts in the local economy. The tail will wag the dog and South Africa will have to find ways to lower effective tax rates to incentives firms to invest and to create jobs.
I hope that the Treasury and the consultants drawing up the national budget take this into account. Government needs to learn that they should help companies and that additional costs will only result in lost investment.