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Thread: Flat tax rates for SA.

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    Site Caretaker Dave A's Avatar
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    Flat tax rates for SA.

    A rather interesting article here suggesting that we would be better off with a flat rate tax system rather than the current progressive rate regime.

    A flat tax in which the ratio of tax to taxable income is the same at all levels of income - and which replaces various tax bands that feature in a progressive tax regime with a single tax - would allow the South African government to gather more tax at lower rates, Free Market Foundation (FMF) economist Jasson Urbach has argued.

    Higher tax rates reduce the incentives of entrepreneurs to risk their capital and sacrifice their time and energy to earn higher incomes, he argued.

    They interfere with the ability of individuals to pursue their goals and result in low after-tax incomes for workers and therefore smaller disposable incomes.

    "Less disposable income means less saving, less saving means less capital formation, less capital formation means lower labour productivity, and lower labour productivity means lower real wages."

    Urbach said for both compassionate and practical reasons there is no merit "whatsoever" in taxing the poor.

    South Africa, at 40%, has one of the highest marginal tax rates of all middle-income countries.

    "By comparison, other middle-income countries have relatively low top marginal rates. Consider the following examples: Botswana (25%), Brazil (28%), Malaysia (28%), Mauritius (25%), Namibia (35%) and Uruguay (0%).

    Higher tax compliance and the expansion of economic activity contribute to a broadening of the tax base, noted Urbach.

    "This explains one of the most paradoxical features of flat tax: the fact that it rapidly brings in more revenue at a lower rate because the lower rate is charged on more income. At a low tax rate, higher-income taxpayers may pay not only more tax, but also a higher proportion of the total. When the United Kingdom cut its tax rates in the 1980s, the top 10% of earners, who had contributed 32% of income tax before the cuts, contributed 45% afterwards."

    Recognising the apparent paradox, a number of countries have recently introduced a flat tax in order to stimulate economic growth, the economist noted. They include Estonia, Iceland, Lithuania, Latvia, Russia, Serbia, Ukraine, Slovakia, Georgia, Romania and Macedonia.
    Full story from M&G here
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    just me duncan drennan's Avatar
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    "Average economic growth for these countries in 2004/05 was 6,9% compared to South Africa's average growth rate of 4,7%. These countries also enjoyed higher rates of gross capital formation as a percentage of GDP with an average of 24% in 2004/05 compared to South Africa's average of 17,5%."
    Interesting....but I suspect that our government is happier to tax higher income earners—it seems to fit in with their general philosophy.

    "Less disposable income means less saving, less saving means less capital formation, less capital formation means lower labour productivity, and lower labour productivity means lower real wages."
    Does it really? We seem to be more like the US—more disposable income means more consumption, but unfortunately our country has to supply the consumption from the outside (like the US actually, hence our high trade deficit)
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    Silver Member Graeme's Avatar
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    Be careful what you wish for - as far as I am aware there are no deductions for this and that under a flat tax - salary earners pay a flat tax on their salaries and investment income and that's the end of it; no deductions for medical and other expenses. Much the same for businesses. But it is wonderfully easy to assess taxes - great for a country where skills are in short supply.

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by Graeme View Post
    Be careful what you wish for
    At this point I have no opinion either way. Right now I simply find the concept rather novel.
    The trouble with opportunity is it normally comes dressed up as work.

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