The warning comes from some of SA’s top economists, including the highly respected Dawie Roodt.
Roodt reacted to this week’s budget presentation by Finance Minister Pravin Gordhan in which he announced an increase in the top tax rate for individuals from 41% to 45%. The government is also increasing the dividend withholding tax rate to 20%, up from the previous 15%.
MyBroadband.co.za reports that while these higher tax rates are “a safe political move”, as it is fashionable to target the rich, it is bad news for the economy. Roodt described the latest budget as “horrible”, highlighting that Gordhan stubbornly continues to increase the size of the state.
“This is socialism running amok where a ravenous state will continue to parasitise the productive sector,” said Roodt. “Clearly government does not understand that they need wealth creators. Instead, it continues to increase the burden of a bloated state on a dwindling number of wealth creators.”
The consequences will be lower growth, lower savings, lower investments, and fewer jobs, said Roodt. “As long as we have a government that assumes that we work for them, investors will look for greener pastures. And a tax revolt may be next.”
BizNews founder Alec Hogg highlighted that highly-taxed rich individuals can easily leave the country. “Much like talented artists or sportsmen who abandon their homelands for places where they are better appreciated, at some point the burden becomes too heavy,” said Hogg.
He said that instead of stimulating entrepreneurship, the government’s higher taxes stifle the productive sector.
Ten men drinking in a bar
Meanwhile Facebook users started explaining the new budget in practical terms – comparing it to ten with various income drinking together in a bar. It spells out one danger – the rich might leave the party.
Here is how the analogy goes:
The South African Tax System:
Suppose that every evening, 10 men go out for beer and the bill for all ten comes to R100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay R1.
The sixth would pay R3.
The seventh would pay R7.
The eighth would pay R12.
The ninth would pay R18.
The tenth man (the richest) would pay R59.
So, that’s what they decided to do……. The 10 men drank in the bar every evening and were quite happy with the arrangement, until one day, the owner said, “Since you are all such good customers, I’m going to reduce the cost of your daily beer by R20”.
Drinks for the 10 men would now cost just R80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men, the paying customers – how could they divide the R20 windfall so that everyone would get his fair share? They realised that R20 divided by six is R3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.
Therefore, the fifth man, like the first four, now paid nothing.
The sixth now paid R2 instead of R3 (33% saving).
The seventh now paid R5 instead of R7 (28% saving).
The eighth now paid R9 instead of R12 (25% saving).
The ninth now paid R14 instead of R18 (22% saving).
The tenth now paid R49 instead of R59 (16% saving).
Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
“I only got a rand out of the R20 saving,” declared the sixth man. He pointed to the tenth man, “but he got R10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a rand too. It’s unfair – he got 10 times more benefit than me!”
“That’s true!” shouted the seventh man. “Why should he get R10 back, when I got only R2? The wealthy always win!”
“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important.
They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists, labour unions and government ministers, is how our tax system works. The people who pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.
