Vol.4 No.15, 30 November 2004
A New Paradigm for Funding Human Capital
The first week of December sees an international conference on education in Johannesburg to consider progress in public education. Almost everywhere it is declining in quality. South Africa is not alone in requiring a new paradigm of thinking about the economics of government revenue.
Of course it is more difficult here. You cannot take over the apartheid education disgrace and transform it to develop all our children without a huge investment - especially where literally half the population lives in dire poverty. That investment is largely in people - their salaries and their training. It is permanent expenditure on a large scale. It is unlikely to come from conventional taxation.
However, there is a way to fund it.
Let me say first that the same applies in the area of health, social services and the justice system.
What all this means is that the best way we can invest for South Africa's future is to train, employ, constantly upskill and support professionals and researchers in all these areas of expertise. That costs money. It is recurrent expenditure. Unlike building prisons or roads or schools it is not one-off. Therefore in today's economic parlance it is regarded as 'unsustainable'. All developmental programmes are expected to limit recurrent expenditure, except where it is self-funding. It is a waste of time to expect that.
But this requirement to commit to long-term support of incomes for people is, in fact, a blessing in disguise, taken in the context of the overall needs of our economy. We live in a post-industrial age. Technology has given such productivity to producers of goods and services that our greatest economic problem is how to sell those products, because the technology puts people out of work. If it takes fewer and fewer people to make the goods - which it does - how are we going to employ the rest so that they can buy those goods.
That is what is happening all over the world. Only an average of about 70% of everything produced is sold. Some 30% is 'over-supplied'. More accurately, it is under-demanded: people need the goods but cannot find employment and hence the income to buy them.
Therefore we need a system that gives income to people - if only to buy the goods the rest of us make. Noone wants to pay people uselessly - for metaphorically digging holes and filling them in. Hence the beauty of recognizing that the real investment needed for our future is in paying people to do vital jobs that will revitalize communities and turn round our economy and the lives of our people.
If a nation needs to raise revenue on a large scale, the best way to do it is through its elected government. That does not mean the government needs to spend it directly: representative agencies close to the recipients may be more effective, more energetic, more accountable. But government must raise the funds. We must end the practice by which essential needs have to be met by currying favour with big business, sponsorship and the exhausting competition of pleasing donors.
How could government raise funds on that scale? It is universally recognized that taxing individuals and companies on the scale necessary risks driving capital and entrepreneurship out of your country. That will continue while we insist that capital may travel without hindrance. But there is another way. It needs a new paradigm of thinking about taxation.
It is a transaction tax on all buying and selling that goes through banks and other financial institutions. Every time anyone writes a cheque or pays cash into the bank it would attract a small tax. It is extremely simple, and it would bring the government a steady stream of revenue without any other collection mechanism. It could be very small because it would be levied on all transactions, and these run into trillions every year. For instance a 0.7% tax (compare that to banks' own transaction fees) would bring our government the same revenue as they now raise from all other taxation - individual, corporate and VAT.
To make that concrete, calculate 0.7% of the income that you receive and spend every year. Then double it, because you would pay the transaction tax when you get it and when you spend it. That would be the total tax you pay every year. And everything you buy would be 14% cheaper, because there would be no VAT. If you are a business, small or large, you would pay no corporate or business taxes at all, and your market would be 14% larger. You could dispense with your accountants and tax lawyers.
Immediately you suggest a new form of taxation you are told it could be evaded. So what's new? Transaction taxes would be much more difficult to evade than today's taxes: the only way to do so would be to drive about with lorry loads of cash, providing as field day for muggers and hijackers.
I am afraid the lobby against it - apart from the tax specialists - would be large companies and rich people who now wangle ways to put practically everything they do under the heading of expenses. They eat, drink, take holidays, buy cars and generally make merry at the taxpayers expense by describing these activities as marketing, PR and other necessary items of expenditure. All of the transactions effected under those headings would attract transaction tax. That is why we would need such a small tax to bring in large revenues.
Without such new thinking about how to bring government revenue, all our research, all our thinking and endeavors will result in disappointment and competition between spending Ministries, because the annual budget is simply too frail to provide half of what we need.
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