It goes without saying that Governments require their citizens to pay tax in order to contribute to the development of the country.
The question of how much tax to pay is far more questionable, especially in societies where there is a perception of corruption and/or ineptness at government level. The purpose of this article is not to debate the question of what tax is acceptable, but, rather to look at the types of taxes which which governments collect and to consider whether (even if just for a moment), there may be a better way. The following taxes are the most commonly found throughout the world:
- Sales Tax / Value Added Tax
- Income Tax
- Capital Gains Tax
- Death Taxes (Estate Duty)
- Property Taxes
- Secondary taxes linked to distribution of income/wealth e.g. Dividends Tax and Donations Tax.
Every country determines its own way of applying varying degrees of the above (and other) taxes. In South Africa, most of our tax policies are based on those founded in the United Kingdom and other developed countries e.g. Australia and New Zealand and would certainly include all of the above-mentioned taxes.
The question to be raised is whether all of these taxes are necessary? Would it not, for example, be a lot simpler to discontinue all forms of taxation and simply focus on Value Added Tax (VAT) as a mechanism for the State to raise its required revenue? It would be necessary to increase the VAT rate, but, this would not be resisted by the population if other taxes are discontinued.
It is often argued that VAT is an unfair tax because it targets everyone, including the poor. But, it can also be argued that Income Tax is equally unfair in that Income Tax focuses on revenue, whether spent or not. For example, leaving your money in a bank account and earning interest is recognised as income and taxed even if such interest is not utilised. Here are some good reasons to argue in favour of a VAT only tax system:
1. Tax Avoidance is Difficult
Let’s face facts, it is much easier for taxpayers to avoid paying their fair share of Income Tax or Capital Gains Tax or Death Taxes through convoluted tax schemes or simple evasion (which is illegal). It is not so easy when it comes to VAT since this is levied by the final supplier of the goods/service to the general public.
2. Equality to Taxpayers
Unfortunately VAT does affect the rich and the poor equally, yet, there are ways of balancing equality among taxpayers. For example, the exemption of basic/essential foodstuffs and/or the increase of the VAT rate on luxury goods. For example, assuming that the VAT rate is currently 15%, VAT on the sales of vehicles could be adjusted as follows:
– 25% VAT if vehicle costs more than R1m
– 0% VAT if vehicle costs less than R250k
Is the above really so unfair? The person who has more money to spend should be able to afford a higher VAT rate. To retain simplified administration you would not want to do this with all items, but, perhaps only with potentially expensive items e.g. Vehicles and Property.
3. Administration is Simplified
Imagine a world without tax returns and related returns such as PAYE. The only return which would be necessary is a monthly (or bi-monthly) VAT return. No more complicated legislation, far less legal tax cases and a far more efficient and simplied Revenue Authority (SARS).
4. Collection is Much Easier
Similarly, collection of VAT is far quicker and easier on a monthly (or bi-monthly) basis that the collection of other taxes.
VAT is more complicated than Sales Tax in that it caters for inputs to be claimed, but, the whole argument above can be taken one step further by proposing to do away with VAT and replacing it with a Sales Tax once goods/services are finally sold to the end consumer.
For such a proposed single tax system to work in South Africa, careful investigation would need to be performed to determine the affects of discontinuing with all tax forms apart from VAT (or ultimately a more simplified Sales Tax system). It would be necessary to increase the rate applicable in such a tax system, but, as indicated earlier, this would be far easier to accept knowing that other taxes will not be levied any longer.
For those who feel that the above approach is out of touch with reality, I would like to point out that there are several states in the USA which have achieved great success economically and administratively by doing away with a host of complicated taxes and only levying a simple Sales Tax. These include Florida and Texas.