SARS' threatening TV ads are counter-productive

Posted 05 January 2015 Written by Loane Sharp
Category Tax

SA Revenue Service (SARS) warns taxpayers in a new series of TV advertisements that "We are closing in on you." That's a far cry from the "SARS thanks you" ads of a year ago. High taxes have resulted in 20% of fuel and 45% of cigarettes in SA being smuggled. The new ads are counter-productive, argues Loane Sharp in Business Day.

In a new series of TV advertisements called "Paranoia", the South African Revenue Service (SARS) warns people: "We’re closing in on you." The character in the advert is jumpy and sweaty. For good reason. Presumably SARS has picked the low-hanging fruit — the 4% of personal income taxpayers who, being easily audited, contribute 41% of all personal income taxes.

But the public isn’t stupid. It knows personal income tax receipts have grown at a compound annual rate of 10.7% (double the rate of inflation) since the 2008 global financial crisis; that the ratio of taxes to gross domestic product has increased from 22.9% to 26.1% since 1994; that public servants’ wages devour 88% of state spending; that 16-million social grants consume 76% of the income taxes paid by the upper middle class; and that at least one-third of all personal income taxes are evaded.

An internet search for "how to evade tax in SA" yields 380,000 highly readable results. SARS’s ads are an inducement, not a warning.

In a previous campaign, "SARS Thanks You", the agency took a different tack, by showing its gratitude to taxpayers for the difference they make to individual lives. One expensive three-minute advertisement inadvertently shows long queues, antiquated equipment and soiled bed linen in a state hospital, with a doctor who calls the scheduled cataract surgery "nerve-wracking". But cataracts are routinely removed in a 30-minute procedure in a private hospital or ophthalmologist’s rooms with a 99.8% success rate.

It was cold comfort for taxpayers that, according to the advert, R442bn would be spent on state health services. The private healthcare system, with just 12% of the resources, serves about the same number of people as the public healthcare system, with vastly better outcomes. The adverts quickly became a laughing stock.

SARS’s original advertising campaign involved amnesties for wayward taxpayers. Amnesties in 1996, 2004, 2006 and 2011 covered business and personal income tax, value-added tax, pay-as-you-earn (PAYE), exchange controls, and sundry excises and duties. It is no coincidence that, over the period 385,000 taxpayers "took advantage" of the amnesties, and 440,000 taxpayers disappeared into the so-called informal sector, the characteristics of which are income-tax evasion and circumvention of labour laws.

While a little compliance did stem from the amnesties, it became an embarrassment to SARS that only 5.2-million people (34.4% of all employed people) paid any personal tax at all, leading it to pass regulations making registration for PAYE compulsory regardless of income, which trebled the number of apparent personal taxpayers to 15.4-million.

As far back as the 14th-century Islamic world, economists understood that, at low tax rates, economic activity flourishes and people comply with their tax obligations. At high tax rates, economic activity recedes and resources are diverted to tax evasion. At some comfortable mid-level tax rate, tax revenues are maximised. SARS appears to be acutely aware that it has reached this point.

The effective rate of personal income tax has remained static at about 19.5% over the past decade. Even for the very rich — those earning more than R5m a year (supposedly only 166 of them) — the effective tax rate has remained static at about 39.7% over the past decade.

Taxes on cigarettes, alcohol and fuel have remained roughly constant in real terms for the reason that 20% of fuel and 45% of cigarettes are smuggled, and the Treasury has little space to raise taxes on these items without promoting further tax evasion.

If SARS and the Treasury continue along the present lines, SA will quickly slide from a predatory to a failed state. The government has proved to be an enthusiastic raiser of taxes and a hollow and insolent provider of services. The delivery of such minimal political goods as security of persons and property, institutions of dispute resolution, institutions of political participation and methods of regulating the use of common resources are at an advanced stage of collapse.

Mining and water rights have been quietly nationalised. People are kept in a state of tenancy in their own homes. Policing is done more effectively by private security companies than the police. Low-fee private schools are growing exponentially while state schools close down.

Private healthcare dominates in the provision of quality medical services. Meanwhile, tax morale is declining and heavy-handed advertising by SARS will keep it so.

Sharp is an economist with the Free Market Foundation.

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