The Flat Tax

South Africa should adopta low flat rate tax system

Free Market Foundation

Robert Hall and Alvin Rabushka• 30 years of presenting and refining

flat tax proposal for USA• Improve incentives to work, save,

invest and take entrepreneurial risks• Save taxpayers huge amounts in

direct and indirect compliance costs• Shift billions of dollars from tax-

saving investments to production

Nightmare of complexity

• Tax systems are complex and costly• High direct costs of compliance• Indirect costs of compliance – lost

labour, capital and total output• Tax evasion – disrespect for other

laws• Tax avoidance – tax saved but output

lost (lawyers, accountants etc)

Flat Tax System

• Consumption Tax• Income taxed only once• Simple, easily understandable• Radically reduce compliance costs• Reduce tax avoidance and evasion• Promote capital formation and

growth

Benefits to be gained

• Eliminate economic distortions• Broaden tax base and lower rates• Replace depreciation complexity by

expensing asset purchases in year of purchase

• Improve incentives to work, save and invest

Exempt the Poor

• Exempt the poor – US example of generous personal allowances

− Married filing jointly $16,500 (R140,000)

− Single $ 9,500 (R 80,000)

− Single – household $14,000 (R120,000)

− Dependants – excludingspouse $ 4,500 (R 38,000)

(Rand conversion at PPP)

Enable small business

• Equal tax treatment for small and large businesses

• Eliminate special allowances• Exempt earnings of small business

owners through individual personal allowances

• End corporatisation tax benefits

Business Tax & Wage Tax

• Two taxes – Business Tax & Wage Tax(same rate – US 19% - SA 15% ??)

• Two postcard-size tax returns• No special allowances• Fringe benefits not deductible by

business or taxable in hands of employees

Fundamental changes

• Capital equipment, structures and land deductible when purchased, taxable when sold

• Interest not business expense, not taxable in hands of lender

• Tax act 3 1/2 pages vs. 2,000 pages tax law - 10,000 pages of regulations (US)

Individual Tax FormForm 1 1995

Your social security number

Present home address (number and street including apartment number or rural route) Spouse’s social security number

1. Wages and salary 1

2. Pension and retirement benefits 2

3. Total compensation (line 1 plus line 2) 3

4. Personal allowance

(a) q$16,500 for married filing jointly 4(a)

(b) q$9,500 for single 4(b)

(c) q$14,000 for single head of household 4(c)

5. Number of dependents, not including spouse 5

6. Pesonal allowances for dependent (line 5 multiplied by $4,500) 6

7. Total personal allowances (line 4 plus line 5) 7

8. Taxable compensation (line 3 less line 7, if positive, otherwise zero) 8

9. Tax (19% of line 8) 9

10. Tax withheld by employer 10

11. Tax due (line 9 less line 10, if positive) 11

12. Refund due (line 10 less line 9, if positive) 12

Individual Wage TaxYour first name and initial (if joint return, also giv e spouse’s name and initial) Last name

City , tow n or post office, state, and ZIP code Your occupation

Spouse's occupation

Business Tax FormForm 2 1995

Employ er Identification number

County

Principal product

1. Gross revenue from sales 1

2. Allowable costs

(a) Purchases of goods, services, and materials 2(a)

(b) Wages, salaries, and pensions 2(b)

(c) Purchases of capital equipment, structures and land 2(c)

3. Total allowable costs (sum of lines 2(a), 2(b), 2(c) 3

4. Taxable income (line 1 less line 3) 4

5. Tax (19% of line 4) 5

6. Carry-forward from 1994 6

7. Interest on carry-forward (6% of line 6) 7

8. Carry-forward into 1995 (line 6 plus line 7) 8

9. Tax due (line 5 less line 8, if positive) 9

10. Carry-forward to 1996 (line 8 less line 5, if positive) 10

Business TaxBusiness name

Street address

City , state, and ZIP code

Costs of US Tax System

• Direct compliance costs, filing and buying expert advice $100 billion

• Direct planning costs – lawyers accountants etc $35+ billion

• Revenue lost to tax evasion $100 billion• Tax avoidance distortions $100 billion• Lobbyists $50 billion Total $385bn

(61.6%)• 1993 Total income tax receipts

$625bn

The Flat Tax authors say…

The adoption of the flat tax would give an enormous boost to the US economy by improving incentives to work, save, invest and take entrepreneurial risks. It would save taxpayers billions in direct and indirect compliance costs and shift billions of dollars from tax saving to productive investment.

Why flat tax not adopted?

Remember, there are thousands of lobbyists in Washington, D.C., who work full time to preserve tax benefits for their interest groups and clients. They contribute large sums to the two congressional tax-writing committees. They fiercely resist the flat tax because it would put them all out of business.

UK & HK – GNI US$ per capita

UK Hong Kong

2009 35,260 45,3202010 34,510 48,1902011 35,270 51,4502012 34,640 51,8902013 35,760 54,260

(from 40% in 1960 to 152% in 2013)

Flat Tax & GNI US$ pc

Russia Estonia Mauritius HK RSA

2009 18,850 19,410 14,180 45,320 10,850

2010 19,910 19,460 15,120 48,190 11,200

2011 21,860 22,080 15,800 51,450 11,640

2012 22,710 22,900 16,540 51,890 11,9702013 23,200 24,230 17,220 54,260

12,240Growth 23.08% 25.29% 21.43% 19.70% 12.81%Tax rate 13% 21% 15% 17%* 40%*

Other investment factorsSouth Africa (SA), Russia (RU), Brazil (BR)

• Govt. enterprises & investment (SA 4/37.70%, RU 10/12.60%, BR 8/15.15%) [Ratings out of 10] • Top marginal tax (SA 6/40%, RU 10/13%, BR

8/28%)• Government consumption (SA 3.88/26.80%, RU

4.03/ 26.30%, BR 4.26/25.50%)• Business costs of crime (SA 3.16, RU 5.82, BR

4.13)• Hiring & firing regulations (SA 4.43, RU 4.47, BR

2.23 )• Capital controls (SA 0.77, RU R4.83, BR 3.08)• EFW rankings (SA 88 RU 101 BR 102) – 152

countries

Thank You

Questions?