ONE conclusion reached in the Davis Tax Committee’s first interim report on value-added tax (VAT) is that "(there is) clear evidence that multiple rates add significantly to the complexity and administrative burden of the tax (and thus) … the adoption of multiple rates is not recommended". Why then has the committee seemingly discarded the evidence that a flat personal income tax rate is also less complex, easier to administer and brings in more revenue?
The late, great Nobel Prize-winning economist, Milton Friedman, proposed a flat tax system in the early 1960s to simplify tax collections and to encourage people to work, save and invest.
He acknowledged that individuals respond to incentives and take steps to further their interests and argued that highly progressive taxes induce taxpayers to find and exploit tax loopholes to reduce their tax payments by hiding or converting income into other forms, either legally or illegally.
A proportional or flat tax, as opposed to a progressive tax system, is one in which the ratio of tax to taxable income is the same at all levels of income. It replaces the various tax bands that feature in a progressive tax regime with a single rate. A "true" flat tax makes no provision for exemptions and provides no special dispensation for low-income earners. However, there is no merit whatsoever in taxing the poor for compassionate reasons, which are obvious, and for the practical reason that the costs of collecting taxes from those below a certain level of income will exceed the amount collected. Low-income earners should therefore be exempt from paying tax on personal income.
A low flat tax would not only be fair, but also broaden the tax base, improve incentives to invest, make tax evasion more difficult and less lucrative, increase economic growth, raise local investment by encouraging capital formation, and create new jobs by increasing real wages and improving incentives to work.
Jasson Urbach
Director, Free Market Foundation
Judge Dennis Davis. Picture: BUSINESS DAY/PUXLEY MAKGATHO
ONE conclusion reached in the Davis Tax Committee’s first interim report on value-added tax (VAT) is that "(there is) clear evidence that multiple rates add significantly to the complexity and administrative burden of the tax (and thus) … the adoption of multiple rates is not recommended". Why then has the committee seemingly discarded the evidence that a flat personal income tax rate is also less complex, easier to administer and brings in more revenue?
The late, great Nobel Prize-winning economist, Milton Friedman, proposed a flat tax system in the early 1960s to simplify tax collections and to encourage people to work, save and invest.
He acknowledged that individuals respond to incentives and take steps to further their interests and argued that highly progressive taxes induce taxpayers to find and exploit tax loopholes to reduce their tax payments by hiding or converting income into other forms, either legally or illegally.
A proportional or flat tax, as opposed to a progressive tax system, is one in which the ratio of tax to taxable income is the same at all levels of income. It replaces the various tax bands that feature in a progressive tax regime with a single rate. A "true" flat tax makes no provision for exemptions and provides no special dispensation for low-income earners. However, there is no merit whatsoever in taxing the poor for compassionate reasons, which are obvious, and for the practical reason that the costs of collecting taxes from those below a certain level of income will exceed the amount collected. Low-income earners should therefore be exempt from paying tax on personal income.
A low flat tax would not only be fair, but also broaden the tax base, improve incentives to invest, make tax evasion more difficult and less lucrative, increase economic growth, raise local investment by encouraging capital formation, and create new jobs by increasing real wages and improving incentives to work.
Jasson Urbach
Director, Free Market Foundation
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