RICHARD J GRANT: SA’s Tax Freedom Day 2024 now expected on May 20

Based on recent tax and spending levels, SA’s Tax Freedom Day is predicted this year to land on May 20, four days later than last year. In December, when we have complete data for the year, the date could be revised a couple of days earlier or later. But over the past 30 years the actual Tax Freedom Day has been trending ever later, meaning most people are getting poorer.

Tax Freedom Day was first calculated and publicised almost 80 years ago by an American businessman. The idea was to compare the total tax burden in his country to a measure of national income. From that he calculated the number of days it would take for the “average person” to earn the tax portion of a year’s income.

Simply, if Tax Freedom Day were on January 1, taxpayers would be paying no tax, and if it falls on December 31 government would be taking all of our incomes as tax and we would have nothing left. The later in the year the day occurs, the worse for the average taxpayer and for anyone who needs a job.

In most societies politicians like to be seen spending money on, or giving it to, their supporters. But they do not like to be seen levying the taxes necessary to cover that spending. The politicians’ motivation differs from that of most economists, who might recommend a broad tax base and a low tax rate in support of tax efficiency, which means to minimise the productivity lost per buck of tax revenue raised.

The politicians might be fine with that, but they are more interested in making taxes less visible to the average voter and in shifting some of those levies into the future through deficit spending.

To calculate Tax Freedom Day, general government expenditure is a simple proxy for tax revenue plus the accumulating burden of deferred taxation through the debt financing of government budget deficits and the net wealth transfers of inflation. Dividing this number by the current GDP would show the tax burden as a percentage of GDP, as well as the percentage of the year spent working to cover that tax burden.

Deficit spending

A problem inherent in government debt financing is that by deferring the visible tax burden associated with current spending, voters are made less aware of the true cost of government activities. Through deficit spending, governments control more resources than current revenue flows would suggest. Just as a consumer is willing to purchase more of a product when its price is lower, the average voter is willing to vote for more government services when they appear to be cheaper. But not all voters or taxpayers are equal in their knowledge of tax treatment. Upper-income taxpayers must surely be aware that each new rand they earn is subject to a 45% marginal tax rate — and higher marginal tax rates dampen productivity.

Resort to deficit financing not only lessens voter awareness of the true cost of government but does so by shifting part of the immediate tax burden onto future taxpayers — both the living and the yet unborn. But taxpayers also bear the accumulated burden of past deficits. Debt-service costs of government debt are now the largest single component in the SA national budget, more than basic education, comprising almost a sixth of consolidated government expenditure. Each round of deficit spending adds to that burden.

As the government increases its expenditure over time its hunger for tax revenue rises just as quickly, thereby pushing Tax Freedom Day to later dates in the year. Since 1996 Tax Freedom Day has migrated from mid-April to mid-May. This corresponds to an increase in general government expenditure from 30% of GDP to 38%. Over the same period the average real GDP growth rate has fallen by three percentage points.

One would hope that this expansion of government was at least intended to improve the standard of living. But the rising tax burden and shift of resources from the private sector to government control has instead resulted in a loss of productivity and slowing growth in incomes. The negative correlation is significant.

The lost productivity is made worse by poor administration of government programmes and agencies, and by the structural disincentives and compliance costs of the regulatory regime, high inflation, ineffective policing and ubiquitous corruption. A complicated and inefficient tax structure adds to the depressing effect of the overall tax take.

We assume that when a government is relatively small it would necessarily prioritise its expenditures, focusing on what is deemed to be essential and most important. As the government expands its activities it would add the “next best” programmes, with each new programme being less important or less productive than the earlier core activities. But as the government expands the private sector retreats, similarly giving up progressively more important production. Costs progressively increase and the standard of living falls.

To promote prosperity rather than stagnation the least the government could do is to keep its expenditure growth rate below that of GDP growth.

• Grant is professor of finance & economics at Cumberland University, Tennessee, and a senior consultant for the Free Market Foundation.