Submission on Rates and Monetary Amounts and Amendment of Revenue Laws Bill (B10-20120)
25 May 2012
Mr Thabadiawa A. Mufamadi,
Chairperson of Parliamentary Standing Committee on Finance c/o Allen Wicomb
Secretary of Committee:
Re Submission on Rates and Monetary Amounts and Amendment of Revenue Laws Bill (B10-20120)
The South African Constitutional Property Rights Foundation (SACPRIF), is a Cape Town based public benefit organization and known to you from the submissions we made to your committee at the public hearings of the 2009 Taxation Laws Amendment Draft Bills. You will recall our suggestion to phase out the income tax and VAT Acts in favour of a ‘rent for revenue’ system. [This is sometimes incorrectly referred to as the ‘single land tax’ but is not a tax at all but a user-charge, like rates and taxes.]
You referred us to SA Treasury’s Mr Keith Engel, Director: Legislative Oversight and Policy Co-ordination, Tax Policy Chief Directorate with the request to report back to you on the merits or otherwise of this orthodox fiscal intervention. Although meetings were held, including one in Pretoria which was attended by Mr Fred Harrison the author of Boom Bust and an international expert, SA Treasury abandoned these discussions in May 2011 without any explanation.
Nevertheless we have decided to address the Executive arm of Government again, through your offices, and accept your invitation to submit comments on the proposed tax rates for 2012/13. Should we not succeed, and our clients have tried to influence your Committee on occasions as well as all Ministers of Finance and Presidents for 17 years and gave evidence at the Constitutional Assembly and to the Katz Tax Commissions, we will have to approach the Constitutional Court with an Application to amend the necessary Laws.
Apart from the fact that the Income Tax and Vat Acts cause citizens to become landless and jobless by discouraging work, investment and trade and making land unaffordable for millions, the Treasury policy of embracing high taxes and high land costs has other negative consequences but it is not written in stone.
We therefore argue that the adoption of these personal taxes was a grave mistake which can only be rectified by introducing a ‘single land-rent’ system that accords entirely with the essential elements of sec 25.5 of the Constitution:-“The State must take reasonable legislative and other measures, within its available resources, to foster conditions which enable citizens to gain access to land on an equitable basis.”
The error appears to have occurred when the Government adopted the 1994 Interim Report of the Katz Tax Commission. This was appointed to report on the ‘appropriateness’ of these taxes under the new Constitutional order. The main risk, in our view, was that the seizure of private property through income taxes and VAT was a felony. The alternative capture of unearned land rents, as recommended to the Commission by Mr P. Meakin, Mr Fred Harrison and others, could not be construed as theft. Here are extracts from the Commission’s Interim Guidelines of Principle as sec 1.5: “In its approach to this Report, the Commission has followed the following general guidelines, which are set out not in any particular order of importance in 1.5.4:-“
(a) Established precepts of taxation
The Commission endorses the following precepts, as articulated in the Report of the Margo Commission:-
For an adequate tax structure the basic characteristics (where the one does not conflict with the other or others) are equity, neutrality, simplicity, certainty, administrative efficiency, cost-effectiveness, flexibility, stability, distributional effectiveness, and a fair balance from the point of view of taxpayers between the respective burdens of direct and indirect tax. The ideal, both for direct and indirect imposts, is a broad based, widely distributed, low-rate, high yield tax, conforming to these other requirements as far as possible.
RESPONSE: This ‘ideal’ cannot be realised because it is irrational and inequitable and so unconstitutional. The fact of the matter is that whenever incomes and consumption (VAT) are taxed in place of land rents the tax burden on private land revenues is lowered and so land prices rise. This is in effect a direct subsidy enjoyed by landowners only and the reason why land prices have risen by fourteen times since 1994 whilst the CPI rose by four.
The use of income taxes and VAT also contradicts sec 25.5 if equitable means affordable and affordable means land becoming devoid of any entry cost. The Commission’s error was to conclude that land prices would rise when land rents, imputed or not, are captured by the State. But of course it is only the costs of labour, savings and goods which rise when taxed. This is the big difference between ‘man-made’ and ‘natural’ assets.
(c) Promotion of economic growth
The Commission believes that a first and major contribution the tax system should make is to assist with the funding of development initiatives, and more specifically to do so through facilitating growth in the economy. In this regard, the RDP White Paper referred to the tax system in the following terms:’
… ‘improved and reformed tax systems will collect more tax without having to raise tax levels (as the RDP succeeds, more taxpayers will be able to contribute to government revenues).’
RESPONSE: The RDP did not succeed but all ‘high-tax, high land-price’ systems are anathema to economic growth because they raise the cost of everything except land as explained above.
(e)The Rule of Law
The Commission notes that the tax system is subject to the Constitution and must conform to society’s commitment to the Rule of Law.
This means not only that the system should be effective in the enforcement of all tax laws, equally and irrespective of status, but also that citizens’ right to be taxed strictly in accordance with the terms of those laws should be scrupulously protected both in the design of those laws and in their implementation.
RESPONSE: Income taxes and VAT are a felony and refute the rule of law. They appropriate a portion of the fruits of citizen’s work and savings, their private property. The saying that ‘death and taxes are the only two certainties in life’ is only true where the rule of law is moribund or where there is no alternative. Here the capture of land rents is different because these are unearned revenues. They are also a pure user-charge (like rates and taxes) which collects the monetary value of the benefits which private lands enjoy through nature, public infrastructure, location, and myriad State services.
It is a wonder that income taxes and VAT have survived for nearly one hundred years. The writing of Thomas Paine springs to mind “A long habit of not thinking a thing wrong, gives it a superficial appearance of being right.”
The SA Treasury knows the difference between taxes and user charges very well and documented these in their “2006 Environmental Fiscal Reform Study” which specifically distinguishes between ‘general’ and ‘individual’ monetary benefits of land. Only the individual benefit principle of user-charges can be equitable:-
6.1.1 A tax is defined as a compulsory unrequited payment not proportional to the good or service received in return for that payment. Since the payment made by an individual or firm does not necessarily equal the benefit derived, the general benefit principal applies.
6.1.3 User charges can be defined as requited payments for specific goods or services rendered. These payments are based on the individual benefit principle and attempt to link the amount paid to the benefit received by a specific individual.
So we have calculated that each of the approximate nine million South African households are expected to pay an average of R5920pm in income taxes and VAT in the year ending February 2013. That will be the amount of land rents which each landowner in Southfield, the Cape Town average suburb will forego in rents when their R5920 private property in taxes and VAT are gradually returned to them.
(g) Moral consensus
The Commission recognises that taxation must be founded on a moral consensus around the need to nurture the tax system as a vital component of our national existence, in the valued ownership of all the people of South Africa. Although there must be room in a democratic society for energetic debate concerning tax measures, the tax system cannot serve as a forum for protest against other perceived wrongs.
RESPONSE: A moral consensus can never be found in the theft of private property embedded in work and savings or in the subsidy of landowners.
(h) Balance between taxes
Both equity and the enhancement of economic growth require a considered balance between direct and indirect taxes, and between taxes based on income, transactions, resource use and consumption, and also require a balanced presence in the system of taxes on capital or wealth. The Commission recognises that economic stability cannot be promoted through attempts to shift the tax burden predominantly onto any single dimension of economic activity.
RESPONSE: Economic stability is neither a priority in the face of five million unemployed (many likely to be unemployable) nor a realistic position for an economy to be in for any prolonged period.
(i) Balance between simplicity and certainty
The Commission recognises that the extension of the tax system to encompass the millions of individuals and smaller enterprises whose engagement with the modern economy is vital for prosperity and redistribution, will be facilitated by simple rules and procedure and a minimum of fiscal complexity. At the same time, the goals of certainty and predictability require that many components of the tax system, relevant particularly to the business sector, be codified in laws and regulations of inevitable complexity.
RESPONSE: The rules for a land-rent based fiscal system are akin to the Property Rates Act 6 of 2004 though excluding buildings and improvements. This is much simpler than those for income taxes and VAT being one centimetre of the binding of a book compared to nearly one metre for the Tax Acts. For business properties the rent would presently be 29% of the ‘added value’ of each enterprise [the GDP of the site] or the market land rent, whichever is the higher.
(j) International competitiveness
The Commission believes it is absolutely vital that the development of the tax system should be responsive to the country’s re-entry into a sophisticated and highly competitive world economy.
RESPONSE: A great pity then that South Africa is not now a low land-price, tax haven like Hong Kong or Singapore where rents contribute ±35% of total revenue and tax rates are some one half South Africa’s. The GDP per person in both these countries are nearly five times that of South Africa. That is because they are attractive investment destinations.
So we alert you to the fact that the Income Tax and VAT Laws do not comply with the Constitution and this prejudices, or waters down, other human rights, such as dignity, life, freedom, slavery, freedom of occupation, housing, security, healthcare and education.These can only respectfully be satisfied once all the citizens have access to land ownership.
For argument on the irrationality and inequity of Income Taxes and VAT refer to Annexure A hereto
Regarding the call for submissions on the above Bill we submit the following suggestions:-
1. Commencing in the 2014/15 budget and continuing for four years until the budget of 2019/20 [but being announced in the 2012/2013 budget to give due notice] the projected income tax and Vat collections are to be gradually reduced to zero.
2.Simultaneously the collection of surface ‘land’ rents as a budget item (currently comprising mining royalties and landing fees etc) be increased to replace the repealed income taxes and VAT.
3. That the amount of land rent payable on each parcel of land be defined as follows: For residential properties:- The highest possible monthly amount per square metre of land which the State Valuer considers that all registered owners in each suburb would be willing to pay in place of income taxes and VAT and on conditions similar to the Municipal Property Rates Act 2004 including perpetual tenure and periodic rent reviews.
For other properties:- 29% of the value-added [the GDP] on each parcel of land OR the land rent determined by the State Valuer WHICHEVER is the higher.
Registered Professional Valuer
Charter Patron of SACPRIF and Chairman, Management Committee Document3 Print Date 26/10/2011
CHALLENGING THE EQUITY AND RATIONALITY OF THE INCOME AND VAT ACTS:
Irrationality of Income Taxes:
Reference the RYAN ALBUTT Constitutional Case CCT 54/09  ZACC 4, sec 51: “But, where the decision is challenged on the grounds of rationality, courts are obliged to examine the means selected to determine whether they are rationally related to the objective sought to be achieved. What must be stressed is that the purpose of the enquiry is to determine not whether there are other means that could have been used, but whether the means selected are rationally related to the objective sought to be achieved. And if objectively speaking they are not, they fall short of the standard demanded by the Constitution.”
Inequity of Income Tax Acts:
SEC 9 OF CONSTITUTION (3) The state may not unfairly discriminate directly or indirectly against anyone on one or more grounds, including race, gender, sex, pregnancy, marital status, ethnic or social origin, colour, sexual orientation, age, disability, religion, conscience, belief, culture, language and birth.
No person may unfairly discriminate directly or indirectly against anyone on one or more grounds in terms of subsection (3). National legislation must be enacted to prevent or prohibit unfair discrimination.
Discrimination on one or more of the grounds listed in subsection (3) (such as singling out landowners for a subsidy PIM) is unfair unless it is established that the discrimination is fair.
NB Land rents are the revenues which accrue to land owners irrespective of any improvements to land. Land rents are determined and collected like rates and taxes.
It is irrational that the State collects income taxes and VAT because, firstly, land prices rise when land rents are renounced by Treasury. (NB the 1805 British perpetual quitrent tenures in the Cape were confined to rents so vacant lands had no entry costs.)
South African urban plots have risen to R485K on average, fourteen times their 1994 prices while CPI rose four times-a world record ratio. Farmland is now being purchased by the State at R60000/hectare.
Such prices are inequitable because they are unearned, relying absolutely on State spending on infrastructure and services and the increase in population, not the owner’s work or capital.
Prima facie they are also unlawful because they contradict sec 25.5 of the Constitution “the State must take reasonable legislative and other measures, within its available resources, to foster conditions which enable citizens to gain access to land on an equitable basis.”
So land rents are the default Constitutional tax, also because there are no adverse supply side effects: the earth does not get smaller when taxed.
It is inequitable that only the well-off can afford land and irrational that the State sanctions this practice by favouring personal taxes over land rents.
It is also irrational not to charge people for leaving land vacant when there are millions who are landless but who could make a decent living on the land, working for themselves. No zoning scheme allows owners not to put land to a use, like the 27m ‘potential’ arable hectares identified by Frost and Sullivan 2007
It is likewise absurd to have a revenue collection service which promotes recessions, regularly destroying millions of jobs and mountains of wealth simply because bankers bet on land values, a proxy for house prices.
If the State captured land rents instead of personal taxes there would be no land prices to bet on because bankers have no more interest speculating on bricks and mortar than on pins, fridges or cars because man-made things depreciate, land does not.
It is senseless for the State to sanction the theft of private property; some would say extortion, when it taxes incomes, profits, savings and consumption. These are criminal acts and it is only when land rents replace income taxes that citizen’s private property will be safeguarded.
That is, the State has no more business stealing from their own people than shooting them, unless there is absolutely no alternative means to raise revenue, such as in wartime.
It is also foolish to tax incomes and consumption because these raise the cost of property, capital, employment and trade. The alternative land rents are a user charge, like site value rating and lower all these costs.
Moreover it is irrational not to collect 100% of all land rents because vacant lands generate no income or VAT. Vacant or rundown lands currently amount to ±10% of the area of South Africa.
Also it is senseless that income taxes, and even flat rate taxes, mean that those who work twelve hours a day pay more to the fisc than their eight hour neighbours, when the land under their houses may share exactly the same benefits of nature, infrastructure and services: enjoy the same rents.
Then it is certainly irrational to have a tax system where many South Africans simply advance money to the state as taxes and then sit back and wait for land prices to catch up. An urban plot in Southfield, an average SA suburb, now sells for ±$US 60K according to ABSA. The current rates and taxes are $ US 300pa. Meanwhile the land price increased by $US 8000 during 2010, twenty five times the rates payable and often more than income tax paid of $US 8400pm by the average resident.
And it is deeply concerning that windfall profits flow to citizens whose land values are enhanced by State spending. The few thousand land owners within seven minutes’ walk of the new Gautrain stations are expected to share land profits of R25bn, the total project cost, with the compliments of all other South African tax-payers. The e-toll project between Pretoria and Joburg will raise the land value of sites which it influences by the same project cost. Infrastructure is self-funding if land rents are used.
It is likewise absurd for the State to buy or expropriate land, say for housing, because it then pays twice. Firstly to create the land value through the myriad infrastructure, amenities and services it provides and secondly in the repurchase.
It is illogical that, because of land prices, the acquisition of commercial agricultural land has to be financed by equity and debt, not recurring rents. It makes capital intensive farming methods mandatory and results in average annual energy consumption of some 4kWh/hectare, equivalent to half a ton of coal.
Alarmingly, this is thirteen times more CO2 than small-farmers use to produce the same yields using low input methods.
Farm mechanisation has also reduced formal agricultural jobs to some 600K when the entire 5M unemployed could be producing organic food for all of South Africa on ±1500m² plots.
Without universal land access other rights become fatally diluted. Thirty percent of all the rights contained in the Bill of Rights lie in this category:
Human dignity relies on self-sufficiency which for the jobless can only be realised by working the land, nature’s shop floor.
Life needs sustenance, raiment and shelter which, apart from begging, borrowing stealing, or social welfare, can only come from applying labour to land.
Freedom includes being able to walk away from an unwanted job when self-employment becomes affordable.
Slavery and forced labour can offer more favourable living conditions than being landless and jobless because slaves are ‘kept’ in food, shelter and attire. They are also provided with full time occupation.
Freedom of occupation (work) is only meaningful to the jobless and unskilled if land is affordable.
Housing relies absolutely on land access for location and building materials.
Security of persons relies on the well-being of others and their ownership of private property.
Environments that are most harmful to health and well-being are found in slums where people naturally congregate when they have no alternative.
Health care, food and water are rights which are difficult to envisage if there is no access to land where food can be grown, water found and a healthier life-style taken up.
Education what chance has anyone to get a great matric when under fed and living in crowded conditions?
And how rational was it to appoint the 1994 Katz Tax Commission to report on the appropriateness of the tax regime and then pack it with tax lawyers and accountants who would all loose their livelihoods if they found in favour of capturing land rents.
The Commission therefore obviously “recognise(d) that economic stability cannot be promoted by attempts to shift the tax burden predominantly onto any single dimension of economic activity1” without making any attempt to prove it, though it is notable that land ismnot an activity: more a place where activity and work all take place.
The Commissioners also broke the unfounded news that “It is not in the tax system that the remedy for poverty is to be found.2”
1sec 1.5.4 (h) the Katz Interim Report page 10
2 Sec 2.4.3 3rd Interim Report of the Katz Commission.
Image courtesy of www.dirmeik.co.za
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