IT IS MAINLY THE "LITTLE PEOPLE" WHO REALLY PAY THE TAXES

 In his book "Understanding the Economy". former UNISA Economics Professor Philip Mohr poses the question: Who really pays the taxes?

To provide the answer he deals with the belief of many people that individuals, companies and or other entities pay the taxes over to SARS and that they actually bear the burden of the taxes paid. He calls this the "flypaper theory" of taxation, according to which the burden of any tax sticks where the government puts it. This of course, is not always the case. VAT, for example is paid over by firms, but tax burden rests fully on the consumers of the goods and services. Government acts as if it determines who bears the actual tax burden.

All that government can do is to determine the statutory or legal incidence of the different taxes but it cannot determine who will ultimately bear the burden of the taxes. The truth is that no one wants to pay taxes; everyone will therefore try to shift the tax forward or backward to somebody else. The effective incidence of paying tax is accordingly different to the statutory incidence of paying tax.

A common mistake in reasoning about the burden of taxation is to assume that company tax is paid by companies. Politicians, voters and commentators frequently argue that companies must pay their fair share of taxes. This creates the impression that taxes on individuals can be lowered if companies pay more. Companies are, however, legal entities owned by individuals. Accordingly all taxes are paid by individuals and no government can shift the tax from an individual to some other entity in the economy.

What it can do is to determine the levels of taxes paid and this is the crux of the matter.
Professor Mathew Lester, of Rhodes University. in his column on taxation published on 16 February 2011 in BUSINESS TIMES under the heading, "Squeezing the `little people` " introduced the subject in a humorous way by quoting disgraced American hotelier, Leona Helmsley, who famously told a subordinate , "only the little people pay tax". This was to haunt her when she was later charged for tax evasion in the courts but nonetheless poses the question---who are the little people?

Tax paid by individuals in South Africa for the 2010/11 year is budgeted at R224-billion out of R648-billion, or about 35%. Of this amount, about 45% comes from 150 000 individuals who pay supertax---they earn more than R556 000 a year. Lester calls them the "bigger little people". The remaining 55% of individual tax is about 19% of all the taxes collected from about 2.1 million individuals who earn between the tax threshold - R56 000 a year - and the supertax level. These are the real "little people", but this is not all they pay!

Business enterprises are mainly tax neutral in the VAT system. VAT is based on "pass the parcel" down the production chain until it gets to the consumer who pays and that is R164- billion per year or 25% of the total taxes collected. Add to this R45-billion of customs and exise duty, add transfer duty of R9-billion which represents another 8% of the taxes collected. This does not take into account the hidden fuel and other taxes which means that when added together the little people pay 78% of all taxes paid.

Not only are the little people paying these taxes but they are also funding the increasing number of recipients of social pensions, child- and other grants and best of all, allowing government to contain the deficit at 6% of the Growth Domestic Product (GDP)---truly remarkable.

As one of the "little people", I will be watching Pravin Gordhan`s lips closely when he presents the budget speech in the National Assembly on 23 February 2011. In fact, I will also closely observe the gestures of the sign language interpreter.

Pieter Rautenbach