Ideas and ideals stymied by revenue shortage
Education Minister Kadar Asmal's valiant plan to extend free basic education to all our children up to matric illustrates an international conundrum of the first order. If education and other services like health and water are to be seen as human rights, how are they to be funded?
Can we envisage a situation in which these services are free to everyone, while those who can afford them are taxed appropriately?
Is it possible to come up with a new taxation system that gives governments the revenues they need, engaging the commitment of electorates to the health of societies as a whole?
Entitlement based on rights is becoming the international aspirational norm - not only in South Africa where the Constitution is explicit, and not only in relation to education, but also to health, water and freedom from hunger. But within the present funding paradigm it is impossible to see how any government can adopt a rights-based approach. It cannot be done by simply rearranging the budget - there isn't enough to go round.
Internationally, there is a growing disjunction between this rights-based provision of public service and the revenue available to governments. Despite the increase in the world's wealth, the conventional tax base of all governments is falling as a proportion of national resources. Everywhere - from Britain to Sweden, from Japan to Nicaragua, from America to India - state schooling is losing teachers, public hospitals are sub-standard, transport, utilities and public spaces are declining.
This is largely because the global freedom of capital to roam the world in search of higher profits, has forced governments into low tax regimes - both corporate and personal. Add to that the difficulty of taxing expanding e-commerce, plus the fact of ageing populations making growing demands on pension funds, and you have increasing strains on falling government revenues.
Low taxation has become something of an ideology: taxpayers have come to assume that taxation is an evil, the necessity of which should be strictly limited. Higher taxing governments are seen as spendthrift and inefficient.
The situation is made worse by the morass of interwoven laws, allowances and tax breaks virtually impossible to understand except with expensive professional help, and crucially punitive for small business. Nearly all taxation is currently based upon value added - illogical by all criteria; very little is based on value subtracted, such as pollution and non-renewable resource use. No wonder it is resented.
Clearly new thinking is required. There is no shortage of new ideas, some of which could have an immediate and dramatic impact. Three come to mind. The first is a tax on international currency transactions. Known as a Tobin tax after its Nobel Prize-winning economist inventor, it could not only raise substantial revenues but would also put a damper on the destructive practice of speculating with currencies. Given that some $3 trillion is traded daily, a tiny tax of say 0.1% could raise enough to relieve all governments of their contributions to the running of the UN. Double that - incidentally further discouraging speculation - and you have enough to wipe out several endemic diseases.
Obviously there would be problems with enforcement. But enforcement is always a problem with taxation. The real problem is the opposition of those who make their money by buying and selling money.
The second idea is a tax on all transactions that pass through financial institutions. In all developed economies, including South Africa, much less than 10% of the money in circulation takes the form of cash. The rest goes through banks, insurance companies and so on. All of that would be taxed as it passes through the banks, the revenue being sent directly to the government's treasury.
In South Africa, a tax of 0.3% would raise as much revenue as all other sources put together. There would be no other form of taxation -- no personal or corporate tax and no VAT. Everything we buy would be cheaper. People would pay tax according to the value of their transactions. Ending their employment of tax lawyers and accountants would offset the relatively heavy burden on the rich. Everyone would benefit except for those professionals.
The only way to avoid the tax would be the unimaginable use of cash for all transactions; and even then the tax would be payable on cash removed from the banks.
The third idea is one which has considerable, if minority, support in Britain. It is that the government should be responsible for spending into circulation any new money that is required to keep the economy expanding. Currently commercial banks create new money in the form of loans to customers. Contrary to popular belief, banks do not lend out savers' deposits: they create new money in the form of loans secured with collateral. Thus all new money creates debt. When it is returned it is added to the assets of the bank.
If governments assumed the right to issue new electronic money, they would have a source of revenue now monopolised by commercial banks. In principle it would be no different from minting new coin, which the government now carries out each year. That coin is spent into the economy by the government debt-free. The same could apply to electronic money.
These ideas are not complicated. But they are new, and they require new frameworks of thought and research. There is no doubt they will be required to counteract the current crisis in government revenues.
The first step should be to establish a research unit within the Ministry of Finance with the explicit task of reviewing, simplifying and extending government revenue sources.
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