Poor misunderstood taxes

Taxes are bad, right? Death and taxes, mentioned in the same breath so tax must be bad. We have to pay it, never want to pay it, imagine what we could afford if we didn’t have to pay it. Taxes are so bad that we spend millions on paying less tax.

But of course that’s all wrong. Taxes are not bad.

Got your attention?  Good. Note that I didn’t say taxes are good. It’s a little more complicated than that.

Even in the most free, capitalist society taxes are necessary. It’s not that paying tax has some sort of magical benefit, but rather than government expenditure (financed through compulsory taxes) is sometimes the optimal solution for the country.

I like having a police force and judicial system and clean, running water and roads and trains and light-houses and compulsory vaccinations and a thousand more things. These are typical examples of goods and services that can better be provided through the scale of a national government and financed through compulsory taxes rather than relying on free markets to provide the appropriate amount of services.

I benefit from every vaccination provided, since it reduces my risk of infection. Most people (and I’m sure I’m included here too) wouldn’t pay for the vaccination of others just because they received a benefit. Rather let somebody else pay for the vaccination since they will also benefit. Do we really want corporations to run our judicial system? Access to good legal representation is already a function of money, I’m quite glad the judge I get trying my case isn’t a function of how much I can afford!

SABC TV licences are not solely about provided television viewing that you want. If we agree that educational programmes and mother-tongue programming are good for the country, then we really don’t want to leave this in the fickle, profit-motivated hands of corporate advertisers. Economic growth driven through a more skilled workforce benefits the entire country. Just because you individually don’t watch SABC2 doesn’t mean there isn’t value to you in paying the paltry R250 per year for a TV licence.

I could go on, but these examples are not new or inspired – they’re age-old arguments of where public goods and externalities mean that government spending is a good thing. Once we recognise that some expenditure is necessary, it follows we need taxes.

So taxes are needed. This doesn’t mean that all taxes are automatically good. The real debate should be around these points:

  1. Is government spending on the right sorts of projects, with positive returns for citizens and where free markets can’t do a better job?
  2. Is government spending relatively free from corruption, fraud, wastage and inefficiency?
  3. Are projects financed through the appropriate mix of debt (to be repaid out of future taxes paid by generations benefiting from the expenditure) and current taxes where the benefit accrues to current citizens?
  4. Is the progressive/regressive nature (and thus redistributive) nature of the tax in keeping with the constitutional balance between property rights of the individual and the need to uplift all citizens and increase overall national utility?
  5. Is the mix of general taxes (income taxes and VAT) and use-specific taxes (rates, fuel levies, business licences) appropriate for the desired outcomes and incentives?
  6. Do the taxes inhibit economic growth (inappropriate taxes on communications, deterrents to  starting businesses and hiring workers) such that the cost is greater than the revenue collected?

These questions are not only more subtle than the complaint of paying too much tax, they are also more difficult to answer. They are also questions that most people can consider multiple perspectives rather than viewing tax as a purely personal, cost-only anathema second only to death.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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  1. Totally agree.

    To add to point 5, I feel there shouldn’t be a mismatch between the tax source and the tax use, i.e. fuel taxes should be used to improve our infrastructure, not pay teachers’ salaries.

    I admit this won’t always be possible, but I think it’s when large mismatches occur that people feel they are paying too much tax, because they probably won’t see the effect as easily.

    1. Well yes, large mismatches as you say, but also very progressive, redistributive taxes, and evidence of fraud and wastage – all of which we have in SA!
      [ok, slight edit, I don’t actually think that current system is too progressive, but proposed NHI-related changes feel like they might push it over the edge]

  2. I understand your argument, but have you actually tried to ride the train or any other form of government sponsored public transport in SA?

    Last time I checked, I have to pay cash for any vaccinations that I want to have.

    The tax regulation is fundamentally flawed, corruption is ripe and government really don’t give a hoot – I do not see the point of paying tax.

    Maybe if I actually received some real benefit from the 14k + a month in tax that I have to pay.

    Don’t get my started on our useless police force…


    1. Yup, you point out several important problems with the way taxes are spent in SA. These are problems with expenditure rather than taxes themselves, but I think from your response we agree anyway. I’m certainly not saying everything is perfect in our government!

      Three, small, responses to your comment.

      South Africa is not a wealthy country, no matter what anyone tries to tell you. So even if our taxes were spent effectively, we’d still have less-than-stellar quality government services. If you are paying R14k in taxes each month, you are in the top couple of percent of earners in SA. You will pay more than the benefit you get, as is the nature of a progressive tax system. Pretty much every country in the world has a progressive tax system. Marginal tax rate in the UK was just upped to 50%. We’re not alone here.
      You’ve picked some good points where government services are failing us. Seriously, does anybody think these areas are working well? However, there are other areas when money is better spent. It’s a little unfair to point out the glaringly bad examples and conclude on that basis.
      Specifically relating to vaccines, these are freely available to children under 6, and the non-flu vaccinations are generally the more important one for our country’s health. See these two links for more detail More free vaccinations and Western Cape DoH instructions on what vaccinations to get and explaining that they are free and details around free rabies vaccinations as a special programme to manage this fatal disease.

      So yes, your frustrations are fair, but the cliched complaints against taxes are still unfounded.

  3. Thanks for the response David,

    I am just at a point of complete irritation with the amount of money I loose to government each month and it feels we really are not getting anything in return.

    Thanks for the links, I’ll check them out.


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