MIKE SCHUSSLER: Narrowing the terms of the tax debate
Taxes are taxes. Total government revenue is something else
I thank professor Philippe Burger from the University of the Free State for taking an interest in the column I wrote (On My Mind, February 21) for the FM’s budget supplement.
I have some points to clarify. First, the difference between tax revenue and total government revenue: total government revenue includes tax revenue and nontax revenue. For example, the dividends that oil countries get from their oil companies, toll fees and income from mineral rights are nontax revenue — revenue that Burger includes in his analysis.
In my column, I focused only on tax revenue — personal income tax, company taxes, VAT and the like — in comparing taxes. Only once did I include nontax revenue, in the form of non-resource revenue that a government collects.
Because of the complexity of the issue, the International Centre for Tax & Development (ICTD) — which produces the most comprehensive tax and government revenue data available — measures government income as a percent of GDP in different ways. It starts with total revenue, including grants and social security payments.
Grants come from other countries and are generally given to poorer ones. Is that a tax? No. So the ICTD then presents total revenue again — this time excluding grants. This revenue is expressed both with and without the social security income collected by government.
The ICTD then shows tax-only revenue, and nontax revenue splits. It also indicates tax-only revenue including and excluding social security payments. And its data is compiled for all levels of government.
Then, the World Bank’s data differs from the International Monetary Fund (IMF) data, as it does not include social security payments because some countries, like SA, have private pension funds, health care and unemployment insurance.
South Africans in 2017 contributed 5.13% of GDP to pension funds. So when Burger compares tax revenue in the IMF data, he must first understand what tax revenue he is analysing. Of the 193 countries in the ICTD dataset, SA would have the 45th-highest tax-to-GDP ratio when social security payments to the government are factored in.
However, as social security payments in SA are made to pension and retirement funds, they are not added to government revenue and taxes. Australia, the US and Chile are similar to SA in this regard. (It’s similar for health insurance, while unemployment insurance in SA is limited to a low salary benchmark and paid over much shorter periods, so some contribute to further unemployment insurance — sometimes on a company level.)
Adding only the pension contributions would lift SA from 45th place to 23rd in terms of tax-only revenue. Remember, however, that retirement savings are compulsory for some employees, as is the case in many a European country. The only difference is that employees in government, for example, pay into the Government Employees Pension Fund and not to the SA Revenue Service.
To obtain a decent health care level, we perhaps need to add the medical insurance many South Africans pay too, which amounts to about 3%. This takes SA to 15th place.
So the best way to compare tax-to-GDP ratios in the case of SA would simply be to use the measure that excludes social security payments — because social security systems differ. In some countries government collects social security while, in others, private retirement or medical insurance funds do. Moreover, one cannot regard social security as a tax in SA because it is not compulsory for all and does not go to the taxman, even if it is a real amount that is subtracted from salaries every month.
The ICTD presents data for tax revenue that excludes social security payments — and this ranking puts SA in 12th place for 2016. (The World Bank, for its part, leaves out some tiny countries with small populations, so there are slight differences in its data.) Again, this is for all levels of government, as it includes property taxes — the main tax collected by local governments.
But Burger smartly points to total revenue — which includes nontax revenue — and this places SA 45th of 190-odd countries in the ICTD ranking.
Would it be fair to include all government revenue when, for example, oil producers collect revenue from state oil companies in the form of dividends? If one looks at total revenue, it makes more sense to focus on non-resource revenue, because resource revenue can be far above 10% of GDP for some countries. That is effectively a windfall those countries get from resources such as oil, minerals and fishing rights.
So, perhaps non-resource government revenue excluding social security is the better comparison. And on this measure, SA is in 14th place — as I stated in my article.
Moreover, nontax revenue includes interest revenues and dividends from state-owned companies, which I would say are hardly part of a tax burden. Nontax revenue also includes tolls, licences, frequency rights and university fees paid at state universities. If Transnet and Eskom paid dividends, SA’s nontax revenue would be higher, would it not?
Incidentally, nontax revenue also does not reflect the school fees South Africans fork out for fee-paying schools. That adds about 0.9% to overall revenue. But this is not added to government revenue at all — something that is unique to SA.
My comparison focused on tax revenue, excluding social security, as I believe this is the simplest comparison of what government has to spend to build roads and redistribute income. And I specifically referred to tax revenue and not government revenue.
No matter which way I look at it, South Africans are highly taxed and get back very little. I will stick with the international facts presented here, and gladly debate further.
- Schüssler is the founder of research house Economists.co.za. This is his response to “Taxed to the Max” (Features, March 14-20)