Tax Freedom Day – 12 May

The Free Market Foundation

After Tax Freedom Day, which falls on 12 May, you can start spending your hard earned income on yourself or your family

Tax Freedom Day is the day on which the average South African taxpayer has earned enough money to cover this year’s tax bill and can start spending money on himself or herself. In effect the total earnings of the average South African taxpayer from 1 January 2008 to 11 May 2008 is equal to the total taxes that they have to pay for 2008.

The Free Market Foundation (FMF) calculates this day annually by using gross domestic product and total taxes paid. These taxes include most of the 21 taxes levied in South Africa as identified in the PricewaterhouseCoopers’ Total Tax Contribution project.

According to Garth Zietsman who was responsible for the calculation “This means that 132 days have been spent working for the government and only from 12 May individuals start working for themselves and their families and have the opportunity to decide what their discretionary spend is. This spend can vary greatly between families but may include improvements to the house, that new car, a holiday or simply saving amounts for the trying times that may lie ahead.”

“South Africa was rated at 5.6 out of 10 in the Size of Government category (of which tax is a component) in the latest Economic Freedom of the World ratings” said FMF director Eustace Davie “and ranks 89th out of the 141 countries rated in the study.” This Size of Government category measures the extent to which a country relies on choice and markets rather than government budgets and political decision-making. “South Africa could achieve higher growth rates by reducing taxes and government involvement in the economy” he said.

Tax Freedom Day in the United States fell on 23 April this year while in Australia it was 24 April. This means that the average South African pays proportionately more taxes to income earned than the average resident in these countries but much less that the average citizen in the United Kingdom where tax freedom day is on 2 June this year or Germany where the date was 13 July in 2007. Belgium’s day was on 10 June 2007 and Canada’s on 20 June 2007. Of course the big difference is that in these countries residents are entitled to significant benefits from social security and pay significant taxes in this regard.

Last year Tax Freedom Day was on 10 May. A move out by 2 days means that the overall tax burden has increased, taking the additional day in the leap year into account, despite the Minister of Finance consistently reducing tax rates in his annual budget speech over the last few years. This extension of two days, despite significant tax relief, may be explained by changes in the tax laws such as limiting deductions or exemptions. It may also be due to bracket creep or fiscal drag as a result of the inflationary effects on income earned.

The concept of Tax Freedom Day was developed and copyrighted in 1948 by Florida businessman Dallas Hostetler, who calculated it each year for the next two decades in the United States. In 1971, Hostetler retired and transferred the copyright to the Tax Foundation in the USA. The copyright in South Africa is owned by The Free Market Foundation which calculates this day every year.

Charles de Wet, PricewaterhouseCoopers (“PwC”) Tax director said “The data gathered during the PwC Total Tax Contribution (TTC) survey makes it possible to calculate the average tax freedom day for the participants who comprised fifty of the largest companies in South Africa, including Sasol, SAB Miller, British American Tobacco and Anglo American.”

Tax Freedom Day for participants was calculated using the concepts defined in the TTC framework and specifically the concept of taxes borne which includes all taxes paid by these companies and reflected as a cost in the income statement such as corporate tax, Secondary Tax on Companies, irrecoverable VAT, property rates, Unemployment Insurance Fund (“UIF”) contributions, Skills Development Levies (“SDL”) etc. In particular this acknowledges that corporate tax that is disclosed in financial statements is not the only tax paid by companies. To calculate the tax burden the total taxes borne were divided by profit before all business taxes and this was translated into days to determine tax freedom day. In 2007 the average tax freedom day for participants in the TTC survey was 29 April.

The purpose of the TTC study was to investigate perceptions that large companies do not pay as much tax as they should. Such perceptions are seldom supported by empirical data and are frequently based on generalisations, speculation and innuendo. Using the Total Tax Contribution framework, which has now been used in South Africa for the first time, it is possible to report information in a format that facilitates comparisons between companies and different countries.

This study reported on the significant contribution that these large companies make totalling R49,6 billion representing approximately 10% of total government receipts for all taxes. Survey participants paid R32.8bn in corporate tax, representing 27.3% of total government corporate tax receipts.

It is also relevant that the large companies who participated in the study perform an important role in collecting taxes on behalf of government. The participants in the TTC survey collected R52,89 billion mostly in respect of employees tax, fuel levies and excise duties.

Tax Freedom Day creates the opportunity to reflect on the tax system and the value that is received for taxes paid. Part of reflecting on the tax system is the interaction with the South African Revenue Service (“SARS”).

The reduction in tax rates for individuals totalling nearly R100 billion in the last 5 years has reduced the tax burden, as has the reduction in the corporate rate. On the legislative front there have been many amendments to particularly the Income Tax Act, which have had a significant impact on business. However as far as the administration of tax is concerned SARS has launched many initiatives of which eFiling has been the most significant. Except for problems associated with the timing of the submission of returns, this has been a resounding success and SARS should be complimented for the way that procedures and service delivery have improved.

About the Free Market Foundation The Free Market Foundation is an independent non-profit policy organisation founded in 1975 to promote and foster an open society, the rule of law, personal liberty, and economic and press freedom as fundamental components of its advocacy of human rights and democracy based on classical liberal principles. It is financed by membership subscriptions, donations and sponsorships.

About PricewaterhouseCoopers PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 146,000 people in 150 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

 Contacts
Eustace Davie
FMF Director
Office: 011 884 0270
E-mail: egdavie@mweb.co.za

OR

Leon Louw
FMF Executive Director
Office: 011 884 0270
Email: fmf@mweb.co.za

OR

Garth Zietsman
Statistician
Cell: 0833093572
E-mail: garth.zietsman@gmail.com

OR

Charles de Wet
PwC Tax Director
Office: +27 21 529 2377
Cell : +27 82 4528737
E-mail: charles.de.wet@za.pwc.com

OR

Lindiwe Magana,
PwC Media Relations Officer
Office: +27 11 797 5042
E-mail: lindiwe.magana@za.pwc.com