Vol.4 No.16, 08 December 2004
Income Tax: A Spoilsport Solution
It's that time of year again. Rueful looks, faintly glazed: 'Must be putting a strain on the old liver, ha ha'. There is a certain class of person that spends much of its time eating and drinking at a high level at someone else's expense.
Who is paying for all this? This is not about parties thrown for friends and relations to celebrate the holidays: those are paid for by the hosts. This is about the functions given by companies, government at all levels, diplomats, even Universities and media institutions? Less rich institutions with pull get their functions sponsored by corporates. The same sorts of people go to all of the functions - people of power and influence assumed worth keeping in with.
Sometimes these functions are almost unbelievably lavish, and can last over several days. Companies fly chosen staff to game reserves, vineyards and beach resorts, offering lavish entertainment on the house. Government functions and visits for media and other influential people rival the most lavish in the private sector. Thousands of guests get through thousands of cases of choice wines and thousands of tons of exquisite nourishment virtually every morning, noon and night. All free, to guests and hosts alike.
Are these parties paid for by the Chief Executive, Minister or diplomat who greets you at the door? Certainly not. By the company or organisation - meaning its shareholders? Perish the thought: shareholders do not throw parties. It's true that the cost goes into company accounts. There it is described as an 'expense' - under something like Marketing or Public Relations, implying that it is vital to the organisation's effectiveness with the public or the market.
The truth is that we the public - tax-payers or/and beneficiaries of tax - pay for all that expensive eating, drinking and entertainment. We pay for it either directly if the hosts are government, or indirectly because it is taken off the profits before tax is calculated. If we are not taxpayers, but in need of services paid for from government revenue, we pay for it by the lack of those services.
Profit-making organisations are extremely ingenious at minimizing their tax by creating 'expenses' out of pleasurable perks and ludicrously elaborate publicity materials, which are deducted before profit is calculated. Not only in the festive season, but throughout the year all sporting, cultural and commemorative events boast lavish corporate entertainment areas where the rich and powerful entertain each other and their aspirant hangers-on. 'Most Valued Clients' get a constant stream of experiential presies from companies, who thereby imply that without such pampering their patronage would be lost. They would be offended to have this activity described as bribery, so I won't.
I often wonder why is this self-serving racket is allowed under our tax laws? Why should the Ministry of Finance deprive itself of tax revenue so that rich people may devour resources and enjoy themselves free? Is there any requirement for a company to prove that those millions spent on that binge resulted in an equivalent return?
It is especially remarkable when we remember that this Minister, Trevor Manuel, is notably scrupulous about not giving people free 'handouts'. This is one of his arguments against the Basic Income Grant.
However, I now realize that the system of allowing companies to classify jollification as tax-free 'expenses' is a strong reason why no government - including our own - will seriously consider replacing our current taxation system with a transaction tax. That would be an obvious improvement for everyone - except beneficiaries of free lunches, cocktails, dinners etc, put on for the purpose of jacking up 'expenses'.
Imagine never having to fill in another tax form - not as an individual, not as a small business, not as a corporation. Imagine not having to calculate or pay VAT - everything you buy would be 14% cheaper. Instead you would pay a small levy - 7 cents in every R100 - every time you pay or receive money through a bank. The reason it is so small, and yet brings in the same revenue, is that it is levied on all economic activity, not just what counts on tax forms.
The government would get a steady stream of revenue electronically, instead of scrutinizing dreadful forms and chasing defaulters. The only way people could avoid it would be to do all transactions in cash - impossible in our complex economy, where only 3% of the money supply is cash.
So where's the rub? Here it is, I now realize. Companies could not get expenses exempted from tax. Everything they pay for and everything they receive would attract the levy. That would ensure they were genuinely efficient, minimizing unnecessary expenses. Therefore it would be good for the country. But it would mean that if companies wanted to throw a bash they would have to pay for it themselves. For me, that would be an advantage, but maybe my opinion is less powerful than theirs.
© South African New Economics Network 2006. Page generated at 17:12; 24 September 2006