MoneywebTax

Garth Zietsman*

Tax Freedom Day, May 2, is the day on which average South African income-earners at last start working for themselves. Almost one-third of their working year (the 121 days from January 1 to May 1) would have been spent working to pay their total taxes for the calendar year, ie, to pay the costs of government.

The concept of Tax Freedom Day (TFD) was developed to provide a measure of the contribution that middle-income taxpayers make to cover the total costs of administering government. Tax takes a greater percentage of some people’s incomes and less of the incomes of others, so TFD is merely a rough guide. The greatest value of the concept is that it gives us an indication as to whether government is taking more or less of our money each year, how much taxes are increasing or decreasing, and how our taxes compare with the taxes of other countries.

SA’s TFD has been creeping further and further into the year. The dates for the past nine years were 2001 / 20 April, 2002 / 22 April, 2003 / 22 April, 2004 / 26 April, 2005 / 1 May, 2006 / 5 May, 2007 / 10 May, 2008 / 12 May and 2009 /10 May. Between 2001 and 2009 government appropriated an additional 12 days of the working lives of the average person. In 2010, it has given back eight days, probably as a result of the credit crunch.

The global credit crunch resulted in lower profits and therefore the step back in TFD in 2010. TFD is calculated by dividing general government revenues by gross domestic product at market prices to establish what proportion of the year’s labour goes to paying for government. That proportion is converted into days of the year to arrive at TFD.

Chris Hart adds “The overall tax burden has a direct bearing on the ability of a country to compete in the global economy. It affects the investment hurdle rate and consequently the growth rate. Global capital allocation decisions are also affected by the tax burden. High tax burdens are often associated with poverty alleviation initiatives. However, this works directly against the ability of a country to reduce poverty.”

The US, in 2010, celebrated TFD on April 9, six days earlier than in 2009 and three weeks earlier than in 2007. According to the Tax Foundation, the reasons for the earlier arrival of TFD in America are  “(1) the recession has reduced tax collections even faster than it has reduced income, and (2) the stimulus package includes large temporary tax cuts for 2009 and 2010.” But, if the budgeted deficit is added, TFD for the US will be considerably later. The Tax Foundation reports that “Americans will pay more in taxes than they will spend on food, clothing and housing combined.”

Australia’s TFD was on April 29 and New Zealand’s will be on May 17 (5 days later than in 2009), the UK’s on June 1.

When commenting on his country’s Tax Freedom Day, Roger Kerr, the Executive Director of the New Zealand Business Round Table said, “No country has achieved per capita growth rates of 4 percent or more a year on a sustained basis with general government spending of around 40 percent or more of GDP.” Kerr’s concern is obviously that NZ’s growth in core government spending at 35.8% of GDP is getting to the point where it will have a seriously negative impact on the country’s economic growth.

FMF executive director, Leon Louw, notes “SA’s spending is at a similar level to NZ’s and anyone believing that our own spending can be increased with impunity without harming economic growth and job creation is seriously mistaken.”

*Garth Zietsman is the statistician responsible for calculating TFD

 Print This Post