ALLEVIATING POVERTY THROUGH CORRECT TAXATION

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ALLEVIATING POVERTY THROUGH
CORRECT TAXATION

Robert W Vivian
Professor of Finance and Insurance
University of the Witwatersrand

DECEMBER 2004

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Alleviating poverty through correct taxation
This article by Professor Robert Vivian addresses an issue that affects all of Africa: taxation and the alleviation of poverty. The article shows how England eradicated poverty through the correct taxation system – certainly a country in which children dying of hunger in squatter camps, are unheard of.

Although the article focuses on the South African tax system, the principles are applicable across the (African) continent.

The new poor: the working class
In assessing a tax system, the point of departure was given by the famous French economist, Baron de Montesquieu (1748), author of The Spirit of the Laws when he wrote:
‘To fix these [state] revenues in a proper manner, regard should be had both of the necessities of the state and those of the subject. ... Nothing requires more wisdom and prudence than the regulation of that portion of which the subject is deprived [by taxation] and that which he suffered to retain’
and:
‘It was judged that every man had an equal share of what was necessary for nature, that whatsoever was necessary for nature was not taxed.’

Fundamental principles
It is thus a simple matter to avoid oppressive taxes, simply determine how much a taxpayer needs to live and that amount is not subject to any taxation, in particular income tax. The most recent commission on taxation in South Africa, the Katz Commission completely ignored these two principles. It paid no regard to the position of the subject, nor ensured that the necessities of life remained outside of the income tax net. It is thus not surprising we ended up with the oppressive system we in South Africa are now enduring.

What surprises me is that we know so very little about things which should be obvious to us all. When I started to research this issue I discovered that because Montesquieu’s two fundamental principles were ignored, South Africa has created a new class of poor - the employed - and their existence, which is obvious, seems to be unknown.

Working class poor
To understand that a new class of poor exists - the employed - let us take a step back in history.
I come from an old fashioned ordinary family - probably the most ordinary imaginable. My grandmother lived with us until she died. My father was employed his entire life, with the same firm, my mother never worked (or even drove a car). I had three sisters, belonged to a boy’s gang that girl’s were not allowed to join and I had a tree house. My father during his entire life had only a modest income but out of this supported a family of seven, owned his own house, car and every year we went on a three week holiday to Durban by the Sea. From this I gained the clear impression that if you were employed, you may not necessarily be wealthy but you will not be poor. This is no longer true.

About a decade ago I came across a strange case - a poor working family. The family consisted of a single parent, I will call her Mrs X, a divorced working mother with two teenage boys. To my surprise the mother was well educated and had a good job. A few years previously she would have been regarded as a leading and respected member of the local community. I was perplexed since I could not see a way out of her dilemma. The one thing that could have changed her lot in life was not to have had children - but the implication of this was astounding - the right to bear children is confined to the very poor or the wealthy. I did not have an answer to her problems but given my own happy background, a single breadwinner supporting seven persons, I could not understand her problems. If she had a problem then virtually every other single working parent would have a similar problem but if so, society was patently oblivious that such a problem even existed - certainly in South Africa - I am unaware that this problem had or has been identified. South Africa had an astounding problem - an employed person could be poor and this person would be powerless to overcome it.

Poverty through taxes and children
What is the cause of this problem? What had changed since my happy childhood? Years later, I found that answer had already been given by a writer, Thomas Paine, who died nearly 200 years previously. Writing in 1792, Paine pointed out that families are ‘rendered poor from the expense of children and the weight of taxes.’ To solve the problem, he proposed that the ‘first step would be to make a remission of taxes to the poor.’ He was advocating Montesquieu’s age old principle that the poor should not pay taxes. By ensuring the poor do not pay taxes, poverty could be eradicated.

Paine pointed out that taxing the poor results in ‘one class of poor trying to support another’ and that the very taxes which they pay would be used to fund the system that oppresses them. He wrote: ‘[they] are compelled to support the fraud that oppresses them.’

The purpose of taxes
Paine however was the first to go beyond the mere remission of taxes on the poor, that ancient right. He examined the purpose to which taxes were then applied. He discovered that the main purpose of taxes at the time, was to enrich government officials and to be used by them to achieve their own personal agendas. He rearranged the budget to achieve a budget of the people for the people and discovered that a surplus could be achieved. Not only could the poor be exempted from taxes but that they, instead of the wealthy, could receive financial support. He reasoned that out of the surplus a child grant could be made. The government of the day was furious and he had to flee England to avoid arrest!

Eradicating poverty
However he made his mark - the English tax system was then designed according to his plan and from that day onwards, an amount equal to the necessities of life was exempt from income tax, a position which continues to this day, in England. Within a few years the impossible happened - the poor not only were exempt from taxes - they received a child grant - poverty as he knew it - was eradicated.

South Africa’s policies, greatly influenced by British policies introduced income tax and followed the Paine system. Income tax was initially set at a level that it could not cause poverty and in addition provided a deduction for dependants and children. So in the case of my father the tax system was designed to ensure that the money he needed to support his mother, his wife and their four children did not fall into the tax net. South Africa never went the extra mile - families were not given a child grant. South African families did not receive assistance but were not impoverished by the tax system.

Change in the wrong direction…
Then there arose new generations of policymakers who knew nothing about the principles of taxation. So General Sales Tax (GST) was introduced, a tax on commodities. They forgot that Paine pointed out ‘men of small estates are more injured by the taxes being thrown on articles of consumption’ than the wealthy. So this tax began to impoverish the middle class and the poor. This tax was quickly extended to a tax on Goods and Services Tax (also called GST- a slight of hand tax - a stealth tax) and the burden quickly increased, to its now 14% (in South Africa). Those who only earn enough to survive and do not earn enough to save would now pay an enormous 14% of their income in tax, from this form of tax alone.

Two other developments also took place. Firstly, the primarily rebate, supposed to be set at a level to ensure that poor families did not pay any income tax at all, set to exclude all the necessities of life from the income tax net, was not increased so income tax increasingly impinged on the necessities of life. Secondly the rebates were attacked. So in cases like my father the amounts he needed so support his mother did not fall within the tax net nor were the amounts he needed to support their children.

…and the path to poverty is trod again
Then came the Margo Commission (1986). It did not recommend that the primary rebate be increased to its correct level but it did recommend that the dependant’s allowance be abolished. Fortunately by that time my grandmother having passed her 90th birthday, had passed on. But future generations would be incapable of supporting their parents - they simply would not have money to do so. That money would once again, the first time since 1792, be taken by the state. The path to poverty caused by taxpayers supporting parents and children would once again be trod. The Margo Commission did however recommend that company dividends be exempt from taxes - muli-millionaires discovered that overnight they had become a great deal wealthier.
The poor became a great deal poorer and the wealthy a great deal wealthier.
The Margo Commission recommended however, that the child rebates be retained. So in the case of my father the money he need to cloth and feed his children was not taken by the state. The Commission in fact warned against abolishing the child rebates until such time the state provided child grants - something Europe had been doing for over a hundred years - but which South Africa never had done.

Children become a burden
Then came the Katz Commission which knew very little about the principles of taxation and obviously did not bother to read, for had it done so it would have read what the Margo Commission had said about child rebates - it may even have read Thomas Paine and understood something about taxation. Because it did not read, it recommended that child rebates be abolished. Although it (the Katz Commission) did not read, it sure had a wonderful imagination - it imagined that the purpose of the child rebates was to encourage parents to have children. It concluded that South Africa now had enough children, or to be more correct salary earners had enough children - so the rebate should be abolished. And so for the first time since 1792, the income parents needed to support their children was taken by the state. Fortunately by that time my father’s children were all grown-up. So for him it was not a problem. Future generations would be in a different position. Taxes and children as in the days of Thomas Paine would drive them into poverty. South Africa had been propelled back to 1792.

Education – the hope of future generations stolen
Thomas Paine had also concluded that the hope of future generations was in them being educated. So Thomas Paine recommended that the state bear the cost of education and indeed thereafter worldwide this increasingly happened. South Africa followed the world practice. The United Nations in its Universal Declaration of Human Rights declared ‘free’ education to be a fundamental right. Education is not free of course, parents pay for it via the tax system. I recall that when I was a child we paid school fees - R4 per year - but the school went to great efforts to tell us that we have absolutely no obligation at all to pay this amount - if we paid it, it was a donation. My father willingly paid this amount. South Africa stopped providing ‘free’ education. From that time onwards the government took the money parents needed to support their children and then made them pay for the education they had already paid for via the tax system - leaving even less money to support children! And so the mystery of Mrs X was solved. She and her children were starving because the government had taken the money they needed to support themselves - having done so, there was not enough left over for them. In addition, being in this desperate position, they had to find additional money for things the state was supposed to be paying for - they had to find money for the Model C school.

Poverty by taxes and children
The astounding conclusion that I was driven to, was correct - Mrs X should not have had any children. Bearing children has become the preserve of the very poor and the wealthy, not the young salary earner. The tax system precludes the possibility of the young employed having children - and now they are not having children and they are not marrying. The state recently introduced a child grant - not for the Mrs Xs of South Africa - but for those poorer. There is now evidence, as there is worldwide, when grants are introduced, that some fall pregnant to get the grant. Future generations of young salary earning taxpayers, who decide not to have children, not to get married, will no doubt take solace knowing that they are paying for others to have children.

The mystery of South Africa’s new class of poor - the employed - is thus solved - in fact, it was solved 200 years ago. The poor are driven into poverty by taxes and children.

Robert W Vivian
Professor of Finance and Insurance
University of the Witwatersrand
vivianr@sebs.wits.ac.za

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