Taxing task to fund the NDP

Pertunia Thulo -- Thu, 02/13/2014 - 00:00

Taxing task to fund the NDP

Professor Raymond Parsons from the NWU Potchefstroom Business School

 

THE successful implementation of the National Development Plan (NDP) — a centrepiece of the 2014 election campaign — will ultimately depend on finance from both domestic and foreign sources to turn the vision of a bigger and better economy by 2030 into reality.

What the NDP envisages will have a major impact on South Africa’s public finances and this will have to be carefully managed to ensure fiscal sustainability.

Beavering away to assist is the Davis tax committee of experts that was appointed last year to overhaul the tax system. Although it intends to complete its work within two years, it is submitting interim reports on aspects such as the tax treatment of small business, the appropriateness of the tax base and tax mix, and base erosion and profit-shifting.

The budget speech on 26 February may capture some early work of the tax committee, whose terms of reference are strongly linked to the NDP.

There will need to be more transparency and interaction as the process of tax reform unfolds. Given that the government has undertaken to align its policies with the NDP, tax policy should underpin its goals, such as assisting small business.

The way South Africa raises tax revenue at different levels of government is crucial to the efficiency of the economy, to incentives to work, save, invest and take risks, to global competitiveness and to the promotion of equity.

“A nation should have a tax system,” said William Simon, former US treasury secretary, “that looks like someone designed it on purpose.” Ideally, it means crafting a strategy that, as far as possible in the uncertainties of the real world, leads to an economically efficient and simple tax system with socially acceptable notions of equity, embodies the minimum distortion of taxpayers’ behaviour and is geared to growth and development.

The NDP assumes that higher levels of investment will largely be funded through domestic savings, which will need to double in 2012 price terms by 2030. This suggests that savings, whether of companies or individuals, may have to be incentivised by the tax system. The challenge for the Davis committee is to find the right balance between a growth-optimal tax base and the level of government spending.

It is to tax revenues that the state looks for the bulk of its income. Unless state spending can be reduced, solutions have to be found in higher taxes, new taxes or better tax collection. It is hard to see how a debate about the “right” ratio of taxation to GDP can be meaningful without a critical interrogation of government spending.

The role of the Davis committee cannot only be an exercise to find new sources of revenue — “to pluck the greatest number of feathers from the goose with the least amount hissing”.

Any tax changes will be subject to trade-offs, depending on which national objective is accorded priority. The committee’s review of the tax system therefore needs to take place within a framework of principles and desired results that are consistent with overall economic and development goals.

There are no simple technocratic solutions to the dilemmas of tax reform. The Davis committee will nonetheless not go far wrong if its basic point of departure is that reform needs to promote optimal and inclusive growth, give rise to equitable outcomes and strive for simplified, efficient tax collection.

Parsons is a special policy adviser to Business Unity South Africa

This article was first published in Sunday Times: Business Times

2014/02/13

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