More on Food and Fuel Prices…

 

 

 

 

 

 

A thought occurs…

 

Eskom, as we are all probably aware by now, seems to be hell-bent on hiking their tariffs to the ordinary South African electricity consumer by 53% this year and by a similar amount next year.

 

I now wonder if, just maybe, we poor and long-suffering victims of the South African corporate and political robber barons might reasonably expect a small glimmer of light at the end of this seemingly endless tunnel of despair in which we find ourselves.

 

In the vein of any good communist or socialist government, it was recently announced by our inefficacious Minister of Health that certain (unspecified) interventionist steps were being considered on the present crisis over rocketing food prices.

 

Just to digress for a moment – why such an announcement should be made by the Minister of Health rather than the Minister for Trade and Industry or the Minister of Finance I find to be confusing. Whilst I am sure that there are public health concerns to be considered if the very poor cannot afford to buy their staple foods, I do feel that any interventions – even in the form of food stamps – would be better managed as part of an overall economic and financial strategy led by the Department of Finance and whose Minister has shown some reasonable degree of competence over the past few years.

 

Anyway, to get back to the point I wish to make…

 

Now, if the South African government is demonstrating a willingness to change its stance and to interfere with normal market forces on food prices then surely, in order to be consistent, it should also consider a similar intervention on fuel and electricity prices.

 

There are several ways in which considerable assistance could be offered to the consumer without necessarily distorting the market and its operations.

 

For example:

1.       VAT could be reduced or removed for all foods, fuels and power supplies;

2.       Eskom could be required to either cease the supply of one third of our total production of electricity for export at the ridiculous price of eleven cents per kilowatt or to export it at prices which would give a far better return, thereby obviating the need to impose punitive tariff hikes on South African domestic consumers;

3.       The fuel industry could be de-regulated so that competition could be allowed on the forecourt and so that supplies of oil could be sourced in a manner that would free South Africans from the artificial and arbitrary pegging of spot prices to the Singapore market;

4.       Introduce new trading rules to control and penalize the exorbitant profiteering in the various commodity (particularly foodstuffs and fuel) markets that results from the unfettered and unnecessary trading, re-trading and re-re-trading of essential goods and commodities.

5.       As previously advocated by Spearpoint, the government could also abolish all direct and indirect taxes (e.g. income, provisional, dividend, corporate, payroll, VAT, fuel levies, compensation, UIF, provincial, municipal, etc. etc. etc. etc….) and replace them with a single, simple “consumer” tax on all goods and services (excepting food, fuel and electricity) in various bands. Thus, incomes would be maximized and protected and the tax burden for individuals and companies would be defined by how much they spent within all sectors of the economy. The tax could be designed and collected on much the same basis as VAT, thereby saving vast amounts in collection costs and public service staffing costs.

 

I am sure that there are other ways in which commerce could be stimulated whilst making the sharing of the tax onus across the entire population far fairer than it is at present. It just requires a little imagination on the part of the government.

 

Most importantly, however, the government, through its own initiative on food prices, has now opened the door to the possibility of constructive intervention in other, critical, sectors of the market economy.

 

Now they must get on with it…

 

 

Spearpoint.

13 May 2008

 

 

 

 

Taxation in South Africa

If there is anything anywhere in the world that can elevate anyone’s blood pressure to dangerous levels it is the subject of taxation.

It’s too high. It’s not fair. It’s never spent or disbursed properly. It’s a royal pain to fill in the annual/quarterly/monthly returns. All taxpayers have, at some time or another, voiced these or similar sentiments. I am no exception.

Taxes are also seen as an iniquitous way of taking the tax payer’s hard-earned money and giving it to people who haven’t earned it and have no right to it.

There are those who will happily tell you why taxes are necessary and how, one way or another, everyone benefits. Of course, these happy people tend often, on investigation, to have some sort of linkage to the implementation, collection or avoidance of taxes – accountants, auditors, academics, government employees and consultants, tax investigators, tax consultants, social workers and so on. Their very livelihoods all too often depend upon inventing, explaining, enforcing, collecting and spending taxation revenues. They have vested interests in the existence and maintenance of the current tax status quo.

Now, poor old Spearpoint can claim no vested interest in taxation other than the fact that he is a taxpayer. He has no specialised knowledge or qualifications on the topic and has to employ a specialist every now and then to do all the unpleasant paperwork necessary to prevent unwanted attention from Mr. Manuel and his minions.

So it is entirely likely that, at some time in the not-too-distant future, Spearpoint is going to be severely upbraided by some or all of the above experts – and, no doubt, by others who class themselves as experts but, for some unaccountable reason, have not appeared on the list –  for his lack of knowledge and qualifications and how dare he speak on something about which he knows so little.

Well, you know, I do know something about taxes; I know how to pay them.

In fact, I’m an expert on paying taxes. Income tax. Capital gains. Dividend taxes. Value Added Tax (VAT). Customs and Excise duties. Municipal rates. Fuel levies. Ad infinitum, it seems at times.

I also know that even this one-sided expertise on taxation qualifies me to make acerbic comment. I know, too, that I am not so embroiled in the theory and practice of raising taxes that there are those odd occasions when I can see the wood – despite the trees – and I know when I am being hoodwinked by all the experts.

I am prepared to concede – reluctantly, in some cases – that taxes, whilst unpleasant, are a necessary evil in today’s society. Our communities are too large and complex for taxes to be abolished. We all want the advantages, benefits and conveniences of medical care, good roads, law enforcement, a standing defence force, public education facilities, health and safety standards, and so on. As individuals we are unable to pay separately or otherwise contribute to each or any of those types of service and which distinguish us from our distant forebears.

The solution developed was the elegant idea of regularly taking from each eligible citizen a small portion of his or her assets as a contribution towards such services and then employing paid professionals to render those services on the citizens’ behalf. It meant less say and control over those payments and how they were utilised but, generally speaking, seemed to work reasonably well.

The main problem, however, was that the creation and employment of a corp of service professionals and tax collectors resulted in those persons having to occasionally justify their existence and associated costs to the taxpayers. It wasn’t long before these persons began to exhibit many of the behaviours characteristic of some of the older professions, such as doctors and lawyers. They began to defend their privileged positions in society. Sociologists call the process “mystification” and involves protecting the so-called profession through a number of measures such as, for example, -

• Restricting entry into the field by requiring various specialist academic and/or other qualifications;
• Formation of professional or trade associations;
• Use of esoteric language and terminology (jargon);

The problem here, of course, is that the providers of the services need to demonstrate on an ongoing basis that they are indispensable and, in general, this is done by complicating what they do to the extent that the ordinary man in the street can neither understand what is being done on his behalf nor, given the morass of laws surrounding these services, can he do it himself.

In the case of the tax collectors, the result has been an ever increasingly complicated set of laws, regulations and rules to the point of total idiocy and rampant, unnecessary expenditures in collecting taxes.

The greatest beneficiaries of our taxation system are the tax legislators, collectors, lawyers, accountants and enforcers. They alone have jobs for life.

In an emerging economy country where the odds against fiscal and economic survival (let alone success) are so great why is it that South Africa should adopt the taxation practices of the West, when we cannot afford them? Why do we feel the need to waste so many of our limited resources in aping other countries which don’t share our poverty?

In a country such as South Africa the concept and application of personal income tax, for example, is not only highly inefficient but also manifestly unfair.

• Only approximately 10% of South Africans are registered income tax payers.
• Personal income tax laws and regulations are excessively – and expensively – complicated.
• Income tax rates are high – even compared with other, less prosperous, African countries.
• The South African tax bureaucracy and tax consultancy industry are parasitical on the economy as a whole and are a disincentive to foreign investment.

It is time for the application of Occam’s Razor (the KISS principle, for those of you not philosophically trained).

Abolish income tax.

Whether you are clever and earning one million Rand a month or not so bright and bring in only five thousand Rand does not matter. It’s yours. Keep it. Spend it, invest it, save it as you will. Stuff it in your mattress. Paper your walls with it. If you want to earn more then do so – no-one will bounce you into a higher tax bracket in order to rob you of the results of your harder work.

Since all South Africans derive benefit from taxes then let let all South Africans contribute to those taxes according to their ability to pay.

Abolish income tax. Get rid of customs duties, fuel levies, municipal rates, charges and other direct and indirect taxes. Abolish VAT and replace it with a goods and services tax at a flat rate. Exempt certain basic categories of goods and services from all taxation – food, utilities, fuels, etc. – so that the very poorest cannot be said to be penalised. Other categories can be taxed at differing flat rates – luxury goods can attract the highest rates since they are usually only within reach of those with the highest disposable incomes.

Disposable income will be 100% of earned income. Those who have high disposable incomes tend to spend more on goods and services than those with lower incomes. Those who consume more goods and services will contribute more to the public purse than those with lower incomes.

In this way every South African will pay their fair share of taxes without favour – much as we already have to pay VAT. The tax base will automatically be expanded to include 100% of the population – something, as far as I am aware, no other country can claim. State revenues will grow without criminalising people’s work and business efforts; every person capable and willing to work and generate wealth will find the incentive to do better because their personal benefits will be directly related to their enterprise and dedication. An additional plus will lie in the fact that no-one will have to be fearfully looking over their shoulder constantly for the footpads of the South African Revenue Service.

Incomes can still be monitored and declared,  but only for the purposes of determining who of those at the bottom of the ladder will require state assistance, much as social grants and pensions are calculated today.

Similar principles can be applied to corporate income and business taxes. Deny the costly claims and exemptions of so-called “special interest” groups. The idea is to establish an universally equitable tax regime – espoused in the stated beliefs and ambitions of every political party and economic theory in existence.

The rules can be simple to the point of comprehension. The methods and costs of collection would be in line with current VAT collection costs – a relatively efficient tax, incidentally. The present costs of administering and collecting income taxes will fall away, generating considerable savings and thereby freeing more money for the uses it was originally claimed for as taxes.

Invigorate South African industry and business. Encourage the work ethic in South Africa. Stimulate productivity, whether in the formal or informal sectors of the economy. Generate wealth at all levels of society and cut the inbuilt waste of our present system of tax assessment and collection. And once the costs of tax collection are cut (such costs not, I believe, factored into the CPIX at present, even though they are, in fact, a significant cost of living), the effect upon inflation will be zero despite the prices of goods and services rising to incorporate the new sales tax.

Already my ears are ringing in anticipation of the cries of outrage coming from all the vested interests of the current taxation system! Of course I am greatly simplifying the matter! But isn’t that what Occam’s Razor is all about?

On balance, I think it preferable that the bulk of South Africans benefit from the taxes they all pay (one way or another) rather than those self-serving individuals and groups who are deriving vast business and professional benefits from the ongoing and increasing complication of our taxation system.

Spearpoint.

Eskom and tariff hikes

Here we go – again.

 Don’t you just love the levels of professionalism and competence we have in South Africa?

1. Eskom removed the world-class skills base it inherited from its pre-1994 days by blindly following the ANC politically correct ideology of reverse affirmative action – it unceremoniously tossed out the white managers, engineers, technicians and linesmen who, rightly or wrongly, had comprised the bulk of expertise within the parastatal.
2. The removal of that skills base, whilst not done exactly overnight, took place over a very short period – too short to permit the recruitment and training of black replacements to the same levels of expertise, remembering that most of the white engineers and so on had served apprenticeships of several years followed by many years of on-the-job training and experience.
3. The ever diminishing numbers of competent personnel suffered increasingly low morale as the process continued and as they watched their world-class operation begin to disintegrate under the onslaught of unskilled time servers brought in through nepotism and racial quotas. “Hey, the government says we are equal and the only difference between us is that the whites have been privileged and we have not and, anyway, what’s so difficult about driving around in nice cars, having nice offices, having secretaries (oops, sorry, personal assistants), fat salaries, and so on. Skills? Aagh, we’ll pick those up as we go along – if we need them. Protestant work ethic? What’s that? We in the ANC and the new government of South Africa are socialist and communists – we don’t believe in that outdated and outmoded thinking since it is not politically correct (according to us) and, in any case, we are just taking over what was built up over generations by our predecessors.”
4. The new management of Eskom failed to understand and apply the concepts and lessons of investment in their inherited money-making machine. When, finally, the new management realised their mistake, they were too frightened of and politically indebted to their major stockholder (the ANC government) to be able to convey the severity of the developing crisis regarding the generation and distribution of electricity; nobody, it seems, was prepared to risk their lovely salaries, bonuses and related perks by being the too-earnest bearer of bad news to the powers-that-be that this wonderful cash cow was, in fact, on the brink of terminal starvation.
5. The ANC and its government officials failed to understand that the good days were on the point of coming to an end. The concept of long-term investment and re-investment totally escaped them. Things were going too well; the economy was proceeding nicely – how could anything be wrong? “To hell with these doomsayers – we, as the government have much more important things to spend money on. We must not delay, for example, spending hundreds of millions of Rands on re-naming towns, streets, municipalities. Anyway, if Eskom does need money later then we’ll look at it closer to the time – I mean, just how long can it take to build a few new power stations and the associated network? In the old days before 1994 we never seemed to have this problem, so how hard can it be?”
6. When, finally, the wheels came off the lumbering juggernaut that is Eskom, what happened? Because of the self-imposed ANC political perceptions of reality were far more important than the actual realities of life, both the government and Eskom, whilst simultaneously admitting a problem and downplaying the seriousness of that problem (admitting error is not a survival trait within the government, the ANC or Eskom), then proceeded to continue the export of substantial proportions of our power production to neighbouring countries – all previous allies to the ANC back in the days of the struggle against Apartheid.

Well, the chickens have well and truly come home to roost.

And in the process we have all been made to look utter fools to ourselves and the world at large. Once again we see that, with the ANC, its government and the various state utilities, style and spin are deemed to  be far more important and relevant that content. We can talk the talk but we’re buggered when we have to walk the walk.

 Now Eskom, with the support of the government, wants to hike its tarrifs by a stated 53%. Aware of the social and potential political fallout the ANC opposes the idea. As does COSATU. As do the bulk of businesses and private individuals. No great surprises there – except for the government’s stance.

Well, if the government is so supportive of the idea, then let the government pay for it.

1. The government is the main shareholder of Eskom.
2. The government failed (by its own – very surprising – admission) to respond in a responsible and responsive manner when, eventually, Eskom brought the problem to its attention.
3. The government has been deriving vast revenues from Eskom for years.
4. The government has failed to spend its budgeted allocations of those revenues through the inefficiencies and incompetence of many of its departments.
5. The government has been enjoying positive revenue balances for many years – partly because of Eskom’s contributions.

As with any other commercial or quasi-commercial enterprise – and especially in the case of a state monopoly – it’s all very well when times are good and you enjoy the huge dividends from your legislated market dominance, but there is an obligation to put your hand in your pocket when times are not so good.

The mere fact that Eskom is a state enterprise renders its revenues as indirect taxation. When that state enterprise turns a profit which is siphoned off into state coffers then that profit is additional (hidden) indirect taxation which is not declared as such. To have Eskom then to increase tariffs by a further massive 53% will subject the consumers of Eskom’s product (i.e. everyone in South Africa) to an undeclared indirect super-tax.

Forget the argument that South Africa has the cheapest electricity in the world. It is a spurious argument, at best. If we can produce electricity at the present price – and make a huge profit into the bargain – then let us benefit from that ability. If lower electricity prices can help to attract foreign investment into this country then let it be! We neither need nor want so-called parity pricing with other countries – it benefits absolutely no-one except traders, speculators and already well-established outside vested interests and whose secondary, derivative economic functions carry questionable economic value to anyone beyond themselves.

Let the government stump up the additional funds the Eskom now needs. The government has assumed the social role of providing the social service of electricity supply; it has enjoyed the spoils of that role and must now discharge its social duty of expanding that role at whatever cost is necessary. Moreover, the government has the moral obligation to the vast majority of its citizens who, even at current Eskom tariffs, can scarcely afford the minimum power they consume.

I just hope that the government has not seen this request for higher tariffs as an excuse to continue bilking the South African entrepreneur and consumer without exposing itself to losing those lovely revenues flowing into the Treasury…

Spearpoint.