When will the Davis Tax Committee reveal that growth and employment are inextricably linked to low taxes and low land prices.

When will the Davis Tax Committee reveal that growth and employment are inextricably linked to low taxes and low land prices.

The Hon Judge Davis “doth protest too much” on how difficult it is for his tax review committee (DTC) to make any headway in determining whether SA’s tax system helps or hinders economic growth and job creation.

For is it not a fundamental tenet that personal taxes on work, savings, profit, shopping, and capital gains are mongrelised methods of funding government and hot-wired to slow economic growth and the destruction of jobs?

Taking this slowly: do taxes on wages and salaries add to the cost of employees? Do taxes on interest, profit and capital gains make the cost of capital dearer? Under a vat regime does one buy less with a hundred rand note?

As the answer is yes, yes, yes what is his Honour doing trawling the world, not least to the dreaded World Bank, for ways to reform personal taxes? Using DTC’s own projections, these personal taxes will hardly alter the fact that their dead-weight burden diminishes GDP growth in South Africa, permanently. And by some six percent annually.

This is anyway what can be read into the tireless calculations of Nic Tideman Professor of Economics at Virginia State University. If empirical evidence is preferred then has not National Treasury, who act as technical consultants to the DTC, told Judge Davis why South Africa’s special enterprise zones offer 50% discounts on corporate tax rates.

Has Treasury also kept it a secret why the rag tag refugees of Hong Kong and Singapore had the same standard of living as South Africans in the 1960s but are now amongst the five wealthiest citizens in the world?

An average Hong Konger is now six times wealthier than a South African. This is not because of some physical difference (like being born with wide angle lenses) but because in Hong Kong the TAX : GDP ratio is 14%, half that of South Africa.

Furthermore Hong Kong’s success is not because the state spends less as a percent of GDP but because land revenues, a rates and taxes surcharge, contribute 35% of the budget. And rates and taxes are not a tax but a progressive user-charge which depends entirely on the benefits of location, four hundred times more expensive in Clifton than in Delft.

Under a rates and taxes regime one can work seventy hours a week and pay the same as a ten hour neighbour, or run a factory 24/7 and match an 8/5 business next door. That is when revenues are confined to rates and taxes it pays to work hard and invest. And foreign direct investors fall over themselves to earn more for less work; the natural law of conservation of energy.

The most damning flaw in taxing work, savings, investment and consumption is not just that these all cost more to do but that land prices rise to the extent that the fisc targets incomes and consumption and not land. Hong Kong enjoys its double dividend of low taxes and low land prices but here it is the opposite. Residential urban land values have risen fifteen times since 1994, a world record relative to a CPI of three.

High taxes and land prices therefore strangle growth but it comes with the unexpected and shrill endorsement for a balance between taxes by the 1994 Katz Tax Commissioners including the then Prof Dennis Davis. Their Interim Guidelines of Principle could not be more unprincipled as sec 1.5 (h): 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.

This is like those spot-the-difference puzzles which show two identical pictures which are not alike. That is, when revenues from ‘natural’ assets like land and the spectrum are captured they behave contrarily to taxes of ‘man-made’ assets. For instance 100% of land revenues can be captured without the earth shrinking one gram because land is inelastic in supply. Land prices will also fall. On the other hand machinery and equipment will start to shrink away when taxed above 30% and prices will rise.

So, like another puzzle, is the honourable Judge Davis connecting the dots? It does not look like it but perhaps he will get there when he finds that growth and employment are inextricably linked to low taxes and land prices.

23. June 2014 by Peter Meakin

photo credit: Gras Land via photopin (license)

low land prices

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