Back in the ’90s my native country, Sweden, launched a tax reform that took the top tax rate on high-income earners down from 80 percent to 50. This followed on the heels of the very successful American tax reform under Reagan and is still referred to in the international literature as a major success. It was not, but that had nothing to do with the tax cuts themselves – the failure of the cuts to boost economic activity was due entirely to other features of the bigger tax reform package.
The idea that motivated cuts in top tax rates in many countries at that time was that when people who already earn a fair amount of money are allowed to keep more of it, they increase their workforce participation – and they save and invest. Many small business owners, in Sweden as well as in the United States, do their tax filing as individuals, which means that a cut in the top income tax rate allows them to expand their business.
The American reform worked well in this respect, extending and strengthening the ’80s growth period and helping reduce the impact of the recession in the early ’90s. The Swedish reform, which was implemented right as the ’90s recession started, had another primary purpose, namely to guarantee the government “revenue neutrality”. This means that the Swedish government were supposed to get as much money from taxpayers after the reform as before – any positive effects on GDP growth was considered to be a bonus check but not an explicit policy goal.
Because the primary goal was to guarantee tax revenue neutrality, the Swedish tax reform actually made matters worse for the Swedish economy. The reform cut taxes on high incomes but raised it massively on consumption. The value added tax – Europe’s onerous and bureaucratic answer to our sales tax – suddenly doubled. Consumer spending dipped dramatically, accelerating an already troubling recession. Growth actually went negative and unemployment skyrocketed.
The lesson to be learned from the difference between the American and the Swedish tax reforms is that when government allows its greed to get in the way of good policy, the economy suffers and bad things happen to regular, hard-working people. This is particularly true today when the efforts to cut top income tax rates has been replaced by a new trend to raise those taxes. Sweden was on to this early, raising its top tax rates already in the late ’90s so that they now top out at 60 percent. Last year the new French president began his pursuit of a ridiculous 75-percent top marginal tax rate. He was followed by president Obama who convinced Congress to return the top federal tax rates to where they were during the Clinton era (without returning to Clinton’s fiscal discpline…).
A common argument for raising the top marginal tax rates is that the “rich” must pay their “fair share”. Those who toss that argument around never define “fair share” explicitly, but their rhetoric and political action tend to give away that as far as they are concerned “fair share” means “every cent you can possibly squeeze out of them”.
Nigel Farage, chairman of the United Kingdom Independence Party, has aptly called the new taxes on high incomes a “hate tax”. It is good that someone speaks up and calls the tax for what it is; the problem is that the hate-tax proponents are still a step ahead of common sense. The latest country to join the hate tax club is South Africa. Linda Ensor of the Business Day reports:
There is widespread agreement among experts that the wealthy will face heavier taxes, as it is a “political necessity”, but they differ on how soon they will be implemented. Some, including South African Institute of Tax Practitioners CE Stiaan Klue, believe an announcement could be made later this month when Finance Minister Pravin Gordhan tables his 2012-13 budget. He said there was scope for the top marginal rate for individuals ”40% for those earning R617 001 or more” to be increased to 42%. High-income earners on R1.5m or more annually could face a tax rate of 45%.
An income of R617,000 is just over $69,000. Not a lot of money, in other words. It tells you quite a bit about the political climate in South Africa. This is a tax that will eat in to families making just a little more than “regular” incomes. While GDP per capita is a measly $11,000, we have to keep in mind – as I have reported before – that South Africa has a Gargantuan unemployment problem. Up to 40 percent of the work force is unemployed, which means that only six out of then working-age South Africans produce the entire GDP. Adjusted this way, the GDP per capita number actually rises to $18,300.
This is still not a high number, but it tells us that it does not take much for two working adults with a college degree and a regular career to earn enough together to be hit by this hate tax.
When two-income families with no particular wealth in the bank face higher taxes, the effect on consumer spending is going to be quick. Once consumer spending flattens out or starts declining, South Africa will face some really serious economic problems.
Business Day again:
Other experts, including economist Mike Schussler, argued that no change was imminent, but higher taxes on the wealthy were likely to come over the next few years. South Africa would be falling in line with international trends in France and elsewhere, he said. Deloitte director Luke Barlow said the emphasis this year would be on compliance rather than new taxes to ensure that high net worth individuals paid their dues. But, in the longer term, he expected the government “to follow the global trend of more onerous taxation on the wealthy as a means to level out the inequality of income levels”.
This means that the rhetoric being floated around in South Africa is the same as in America, France, Greece, Spain and other countries that have raised, or are considering raising, the top income tax rates. The tax hikers don’t even pretend to be worried about funding their welfare state – it is all a matter of reducing or eliminating the differences between, on the one hand, hard work and entrepreneurship and, on the other hand, sloth and indolence.
Business Day has more hate-tax rhetoric to report:
Mr Klue said a higher tax on top earners was essential, not because of the revenue it would generate, but for creating social cohesion and improving the integrity and morality of the tax system. “It is politically the right thing to do. “The time is right for this. The poor are not happy that there is such a great disparity between low-and high-income earners. “The population has to believe that a redistribution of wealth is taking place.”
It is not a matter of redistributing wealth. A lot of people who are hit by this tax hike are not wealthy:
Mr Klue said the top marginal tax rate for individuals of 40% applies to a salary of about R617,000 a year, which is earned by relatively junior directors or executive secretaries.
And if two people in that income bracket happen to be married, the hate-tax advocates will depict them as being exorbitantly wealthy.
Interestingly, those who support higher taxes on higher incomes are also acutely aware that their tax discourages work, and even drives people to emigrate:
But care would have to be taken on the way such a tax was introduced, as South Africa could not afford to lose its rich citizens, Mr Schussler warned. It might be introduced as a quid pro quo for an increase in the value added tax rate on luxury goods.
With four in ten working adults being unemployed, and with the GDP growth outlook being uncertain at best, the last thing the South African economy needs is a tax hike that will cost more jobs. But as with everything else that socialists do, the ANC government is not going to let economics and common sense get in the way of their ideological crusade.