Taxes and democracy

Sarah Truen

The first point worth noting is that South Africa has an unusually wide tax base for our level of income, and an unusually high emphasis on corporate and income taxes. In many other developing countries, the tax base is disproportionately made up of sales and import taxes, which are usually much easier to collect and administer. But there is a limit to how much tax you can collect from these sources, so countries which rely on them tend to have fairly small governments. Corporate and income taxes, in contrast, allow you to collect much more revenue, but can be quite difficult to collect, and if you don’t have a culture of voluntary compliance with the tax system, they can be extremely difficult to collect.

It is very, very useful to have the kind of tax base that South Africa has. Firstly, sales and income taxes are typically regressive in nature – they impact disproportionately on the poor. In contrast, you can easily design corporate and income taxes to be progressive in nature, by for example exempting the poor. In addition, a government which has access to large tax revenues has much more ability to institute the kind of big redistributive programs which have real potential to transform society. So this element of our tax system is worth keeping and defending, given that we urgently need to undertake such transformation, and reduce income disparities.

The second interesting thing to discuss is the feedback loops between wide tax bases and democratic institutions. As noted, collecting taxes can be prohibitively difficult, unless a fairly large proportion of the tax base complies voluntarily with the tax system. For this to work, there has to be a sense among the majority of tax payers that the tax system is legitimate. In practice, this means a perception that corruption levels are not too high, that people have a voice in the system, [1] and (probably) a sense that taxes are being spent in a roughly “fair” way (ie at least partly on them). Conversely, people who pay taxes may feel more vested in the country, and be more participative in democratic institutions.

What this suggests is that there are currently strong limits to the extent to which the government can introduce significant changes in tax policy. In the words of Ebrahim Patel “When there are real and legitimate concerns about corruption and state capture about the diversion of the people’s money to improperly benefit individuals, our ability to forge a partnership between the state and the rest of society is seriously undermined.”[2] The campaign of non-compliance with the e-tolls may be an early indication of the potential for civic disobedience to disrupt revenue collection systems. A big increase in tax levels, at a time when there are serious questions being asked about state governance, has a real risk of killing the goose that lays the golden egg – namely the high levels of voluntary tax compliance which allow us to fund a more interventionist state in the first place.

[1] See for example the discussion in Bird, R., Martinez-Vazquez, J & Torgler, B. 2008. Tax Effort in Developing Countries and High Income Countries: The Impact of Corruption, Voice and Accountability. Economic Analysis & Policy, Vol. 38 No. 1, March 2008.