Symmetry and savvy

The DA is quite negative on the new taxes proposed for the mining sector. They seem to argue that higher taxes will discourage employment and investment.

I haven’t analysed the details thoroughly so maybe they are correct. I suspect that it’s more dogmatic following of views from those who don’t understand the pros and cons well enough to change their mind.

For example, if higher taxes are bad for employment and investment, surely lower taxes would be good for employment and investment? I doubt that the DA is arguing that the current level of taxes is exactly optimal, so shouldn’t they have been campaigning more loudly for lower taxes?

The reality is that, considered on their own, higher taxes will reduce rates of return to shareholders. This will make marginal operations unecnomical, which could result in job losses. The lower after-tax profit may also push  operations with marginal rates of return to below the required hurdle rate of some investors, reducing total investment in the sector.

This is, of course, true for all taxes. Hopefully there aren’t too many people left who believe that taxes should not exist.

So one real question is whether the tax rate is optimal, given the funds that can be directed towards government revenues in general and to specific employment creation and industrial development programmes specifically.

A second real question is whether the “price” for the permanent removal of natural resources being charged is appropriate (a combination of taxes and royalties) and from a philosophical perspective, who “owns” our country’s natural resources?

This leads to the third question or point that the DA really should be more aware of. Nationalisation, the Freedom Charter, and vast income inequalities are all part of a potent political conversation in South Africa. With nationalisation almost entirely off the table at the moment, being able to demonstrate in some manner that the “riches under the ground” are better being shared with everyone is an important political point to counter the more extreme political views.

The DA, in this instance, is blind to the subtler political benefits of this approach, blind to the definite benefits of increased revenues, blind to the possible benefits of focussed attention on this industry cluster, but completely convinced of the first-year economics free market principle of “tax leads to deadweight loss of consumer and supplier surplus” and thus lower employment and investment.

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. Unfortunately you are looking at this entirely from an “employee” stance. Start your own business. Then we will talk. Employing people, taxes, red tape, banks etc will become park of your daily life and you will clearly understand a number of vital things :
    1. Do not under any circumstances employ anyone if you can help it
    2. Taxes, direct and indirect, eat almost all your revenue
    3. Red tape costs so much time and money
    4. Banks are not there to help
    5. I could go on….

    1. Thanks for the comment. Your points about the difficulties of doing business are probably the key to an entirely new post!

      I agree, there are still too many deterrents to business, particularly SMEs, in South Africa. However, I really don’t see how you read my article and think I’m talking about “employees”. My discussion is about national economic policy. The three points I make are not particularly for “employees” but rather for the interests of our country as a whole. I’m talking about the best ways to raise tax to pay for public services that we do need. I’m talking about how to ensure that South Africans benefit from our limited natural resources. I’m also taking about the crude complaint from the DA about “higher taxes” now suddenly, as if the current level is optimal.

      Actually, just to be clear, did you read this part of my original post? Given that I’ve agreed with your point about the impact of taxes on employment, maybe take another look at the rest of the points I was making.

      The reality is that, considered on their own, higher taxes will reduce rates of return to shareholders. This will make marginal operations unecnomical, which could result in job losses.

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