RICHARD J GRANT: Weigh the burden and benefits of an ever-receding Tax Freedom Day

Tax burdens have a tendency not to stay where you put them. You might believe you are taxing just one thing, but the effects show up elsewhere.

Suppose we vote to impose a large excise tax on luxury cars; after all, the rich have plenty of money and they do not really need such a big car.

But suppose also, as is often the case, the buyers of these products are more sensitive to price than we thought, and they buy fewer cars. That means that the producers of these cars will suffer sales losses and be forced to cut back production and to reduce the number of workers they employ.

That is not to say you should never tax luxury goods but that you should be aware of the consequences before you impose it.

The same is true of all types of taxes. When you place a tax on an activity, such as earning income or purchasing a particular product, you will get less of that activity performed or product sold and the price of the product will be higher. How much less and how much higher will depend on how sensitive producers and buyers are to the tax cost of their actions.

Most taxes are imposed to raise revenue for government expenditures. When you vote for increased government spending, you are also voting to increase the tax burden. There is no escape from that connection.

Politicians have an incentive to be seen as giving to, or spending money on, their constituents while looking away from the impending tax burden. That is why governments run budget deficits: they spend more than they believe their constituents are willing or able to pay. By financing their deficits with debt, they can defer some of the perceived tax burden to future taxpayers, to some day beyond the next election. But the debt goes on the balance sheet now.

Just as different types of government expenditure can be more or less beneficial, and often is wasteful or harmful, different types of taxes will have differently experienced burdens and different collection costs.

Thus, the overall tax burden is greater than the sum of tax revenue received by the government. Sometimes, as with “sin taxes”, the burden — not the revenue — is the primary purpose of the tax.

Those responsible for creating the need for and imposition of taxes must weigh the burden against the expected benefits. The average voter, who is not called to the details of fiscal policy, should still be aware of what proportion of earnings are claimed by government demand.

A simple way to visualise the minimum annual tax burden is to measure consolidated government spending as a proportion of GDP. That is the equivalent of current-year tax revenue plus the deficit, which is the present value of the deferred tax burden.

Though there is never a day in the year when we are truly free of tax, a helpful way to illustrate the burden is to ask how many days of the year an “average person” must work to pay all his or her taxes. If, starting on January 1, you devoted all your income to paying your total annual tax bill, on what day of the year would you become “free” from tax payments? That day is known as Tax Freedom Day.

Tax burden growth

Thirty years ago, SA’s Tax Freedom Day fell on April 23. This year, Tax Freedom Day is projected to fall on May 16. That means that since 1995, consolidated government expenditure and the tax burden required to support it have grown from 30% of GDP to almost 37% this year. The growth rates of expenditure and GDP fluctuate over time, but the proportion of GDP taken up by government expenditure has increased on average by about a quarter of a percentage point annually over those 30 years.

The dates for Tax Freedom Day are based on historical statistics published by the government. When that data is revised, as often happens for the most recent years, the previously calculated date should also change. The new dates for 2023 and 2024 are May 15 (from the 16th) and May 16 (from the 20th). Given that the year 2025 is not yet complete, the date of May 16 is based on a simple forecast and suggests little change from last year.

There are natural limits to how much of the national income and wealth the government can take as tax revenue. Each country is different in this regard depending on the dominant culture, type of government and the circumstances, such as crises, that capture the imagination of the time.

But at some level, the burden of government will drag down the productivity growth rate.

SA’s GDP per capita has been relatively flat for the past 10 years; perhaps those who are expected to bear the tax burden will just not stay put.

• Grant is professor of finance and economics at Cumberland University and a senior associate at the Free Market Foundation.