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We read for you June 2014

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Tax, Lies and Red Tape: Confessions of an unreconstructed Neoliberal Fundamentalist

By Dawie Roodt, with Linette Retief Presented by Andr Roux

Date: June 2014

Inspiring thought leadership across Africa

2014/06/09

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Tax, lies and red tape: Confessions of an unreconstructed

neoliberal fundamentalist

Dawie Roodt, with Linette

Retief

Andr Roux

June 2014

Inspiring thought leadership across

Africa

WE READ FOR YOU

Main title:

Disdain for the recurring theme of state intervention; wishes and pipe dreams

Plan for the economy, based on simplicity and choice

Clear guidelines

Freedom choice

To stimulate a Damascus experience; a paradigm shift

Sub-title

Old school, free-market thinking

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FUNDAMENTAL PRINCIPLES AND BELIEFS

Conventional wisdom is neither necessarily true nor accurate. often a major obstacle to new research, knowledge, or visionary thinking.

Private property rights in the very broad sense of the word (including over life and immaterial belongings)

- right of movement

- right to sign a contract with whomever, on any basis

- right to trade

Therefore, firmly in favour of capitalism/ a free-market system.. The invisible hand allows people to ultimately look out for themselves, and through the trade and entrepreneurship that results from this economic self-centredness, society as a whole benefits more than it would have otherwise . Government intervention often inhibits this invisible hand

FUNDAMENTAL PRINCIPLES AND BELIEFS

Conventional wisdom is neither necessarily true nor accurate. often a major obstacle to new research, knowledge, or visionary thinking.

Private property rights in the very broad sense of the word (including over life and immaterial belongings)

- right of movement

- right to sign a contract with whomever, on any basis

- right to trade

Therefore, firmly in favour of capitalism/ a free-market system.. The invisible hand allows people to ultimately look out for themselves, and through the trade and entrepreneurship that results from this economic self-centredness, society as a whole benefits more than it would have otherwise . Government intervention often inhibits this invisible hand

Rhino horn

Solution = allow farmers to sell horn for profit

pp 12-15

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PLAN OF THE BOOK

Chapter Title

2 The history of mankind and markets

3 The problem with communism

4 What can we learn from the Great Recession

5 How the state spends your money

6 Our taxing regime

7 Central banks and monetary policy

8 Trade and tribulations

9 Why is labour not working

10 What the future holds

THE HISTORY OF MANKIND AND MARKETS

Discovery of fire (cooking) = more energy = more strength = creation of a surplus of time

Strength and time enabled humankind to invent and develop major economic breakthroughs

- wheel

- taming and domestication of animals

= property, which man wanted to protect

= significant surpluses

= change in values respect for others property

- domestication of plants

- specialisation commerce and trade rules, laws and property rights

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THE HISTORY OF MANKIND AND MARKETS

Other hallmarks of civilisation

Organised government

Organised religion

Job specialisation

Social class

Writing and record-keeping

Arts and architecture

Human development did not progress linearly backward steps were also taken, eg communism

THE PROBLEM WITH COMMUNISM

Main goals of communism

No social class

No money

No state

!!!!!!!!!!!!

Local communists dont understand their own ideology, yet these are the very people who have the

power to make decisions about the countrys economic policy.

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Zwelinzima Vavi (2012)

The creation of the CPSA was also a great breakthrough in non-racialism

CPSA was created in 1921 under the slogan

Workers of the world unite and fight for white South Africa


The root of the problem= resource allocation:

Fixation on fixed prices

Trying to anticipate the needs of the economy

Allocating resources to achieve some or other political objective (not to serve the inhabitants of the land)

Micro-management of every aspect of the system

Scandalous surpluses

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WHAT CAN WE LEARN FROM THE GREAT RECESSION?

Three sets of reasons why the credit bubble burst:

Emotional arguments values, greed, excessive risk-taking

Technical insufficient capital reserves, incorrect pricing of assets and risks, warped credit ratings

Fundamental considerations too-low interest rates, an overly accommodating fiscal policy approach, and other measures that encouraged the accumulation of private and public debt . And ultimately all bubbles burst

X

X

WHAT CAN WE LEARN FROM THE GREAT RECESSION?

Two approaches to fixing the mess

USA move private sector debt to the public sector; printing money

Europe austerity impact on growth? Euro?

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HOW THE STATE SPENDS YOUR MONEY

What (core) functions should be provided by the state?

Collective goods the state should provide those things from which its citizens cannot be excluded

Defence

Law and order

Independent judiciary

And arguably infrastructure


However, in SA secondary functions dominate the social security tail has started to wag the fiscal dog

Item Rbn % of total

Education 212 21.0

Health care

132 13.1

Social develop-ment

164 16.2

Housing 97 9.5

TOTAL 603 59.8

Item Rbn % of total

Economic services & infrastructure

112 11.1

Defence 38 3.8

Justice, crime prevention & security

99 9.8

TOTAL 249 24.7

Secondary functions Core functions

2012/2013

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Thus, the redistribution function of the state is growing in importance

Problem!! Recipients of this largesse are not the major contributors to the state, but they are in the majority will therefore continue to vote for a bigger tax burden on the minority until, theoretically, everybodys income will eventually be the same

More state spending now to be funded by more taxes and more borrowing debt explosion/ default/ economic collapse is this a fundamental flaw of democracy?


Education: Spending > Outcomes Solutions

SADTU

Teachers (paid to do a bad job) and children (dont have to work hard to pass) are in cahoots to preserve the status quo thus break this cosy relationship

Different education systems and curricula

Increased autonomy for schools

Allow schools to generate own revenue

Vouchers present to any school of their choice

Incentivise children with lots of money to gain, eg, a distinction in maths or science

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Social grants: Unintended consequences

e.g., culture of dependency, artificial stimulation of economy (inflation, weaker currency)

Thatcher

The problem with socialism is that at some point you run out of other peoples money

Solutions

Introduce more means tests

Parent must prove that child goes to school, has been innoculated, has a certain mass in line with its age


The three great evils

Unemployment: the real problem is barriers to entry

Poverty: the real problem is we have too few rich people

Inequality: the real problem is a perception problem

- inequality allows the rich to save more for future investments

- in a system of unequal distribution entrepreneurship, hard work and good skills are rewarded incentive for others to become wealthy

Inequality only a problem when associated with other differences (race, political insiders vs outsiders)

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Growing concern about budget deficits and rising state debt

Thus, create a statutory fiscal council that plays an independent evaluative and directional role in fiscal policy (c/f monetary policy).

VAT can be adjusted up or down to ensure that a fiscal surplus is achieved at all times over the economic cycle

This could make voters realise that they cannot simply demand more the money has to come from somewhere

OUR TAXING TAX REGIME

The characteristics of a good tax system

Fairness

Cost-effectiveness

Simple and easy to understand

Enables state to collect sufficient revenue

Neutral

Aim to diminish the individual tax burden by spreading the tax load

SA does not fair very well in respect of the above especially load spreading every individula taxpayer

supports 9 people who do not pay tax

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Improving SAs tax system to ensure fiscal survival

Simplify

Reduce the number of personal income-tax brackets

Let small and large companies pay the same (much lower) income tax (on turnover, not profit)

Increase VAT (no zero-rated items)

Abolish taxes on dividends and CGT

Simplify sin taxes

Implement more user charges


Another word on inequality

SA has

have-lots

have-littles

have-nothings

The have-littles are refusing to share with the have-nothings .

labour laws act as barriers to entry for the have-nothings

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CENTRAL BANKS AND MONETARY POLICY

Crash course on money and monetary policy

Role and autonomy of central bank

Money creation

Inflation and exchange rates

Gold standard

Quantitative easing

TRADE AND TRIBULATIONS

Why do we trade?

- to obtain things that we would not otherwise be able to get our hands on

Why is it better to encourage trade than restricting it?

- specialisation; comparative advantage

Where does competition fit into the picture?

- consumer welfare is the unintended and coincidental by-product (result) of competition; you cannot create more welfare by instructing competition

- Competition Act, Competition Commission a waste of time and taxpayers money!

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In fact.

Companies do not compete to give consumers a better deal

Companies try to kill the competition

Capitalists dont like competition; everything businesses do is anti-competitive (eg, advertising, moving closer to the market)

Collusion often works to the benefit of consumers


Competition Act: Reservations and anomalies

Price fixing often attracts competition (prices are almost always fixed at a high level)

The Act actually includes alist of fixed tariffs for 1000s of different medical, dental and allied treatments

The prices of petrol and oil products are fixed by government

Moreover, greed is good; it works; and because it optimises the use of scarce resources, it minimises wastefulness

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Converging prices are not the result of collusion, but actually the consequence of competition

How could the Competition Commission and Competition Act brighten our economy?

- tackle Eskom, the regulated fuel price, anti- competitive import tariffs on clothing

- help SA take advantage of the ICT society by addressing the heavily protected telecommunications industry

- distinguish between anti-competitive practices (behaviour of protected cartels) and competition itself (aggressive rearguard action by large incumbents hoping to save their businesses in a fast-moving, dog-eat-dog market)

WHY IS LABOUR NOT WORKING?

The flaw in the idea of job creation is the very notion that jobs must be created entrepreneurs do not employ people because they want to do so; they employ people because they dont have a choice its the only way in which they can capitalise on their economic activities.

Jobs happen - if the circumstances are right

Workers are not being exploited (the only way in which workers can be exploited is when they are slaves with no choices or options)

Small business owners are being exploited greedy taxman, aggressive workforce, regressive legislation

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Fig 9.1


The state as an employer

Year No of emplo-

yees

% of total employ-

ment

1999 1.008m 9.7

2005 1.089m 8.7

2011 1.3m 9.9

Central & provincial governments

All levels of govt, SOEs, statutory

institutions: 2.8m = 21% of total

workforce

Average civil servants remuneration is 30-40%

higher than private sector counterpart

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Solutions for labour law restrictions

State should employ as few people as possible AND improve productivity or cut wages to levels comparable with private sector

Liberalise labour legislation (make it easier to hire and fire)

Get rid of laws that affect employment (eg, required registration for UIF; or proposed law on licensing all businesses)

WHAT THE FUTURE HOLDS

Can SA expect a demographic dividend?

If not, can we generate one?

If the wave arrives, are we ready to capitalise on it?

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Daniel Stelter

Deal with the debt overhang, immediately

Reduce unfunded liabilities

Increase the efficiency of government

Prepare for labour scarcity

Develop smart immigration policies

Invest in education

Reinvest in the asset base

Increase raw material efficiency

Co-operate on a global basis

Remove the next Kondratiev wave


Daniel Stelter

Deal with the debt overhang, immediately

Reduce unfunded liabilities

Increase the efficiency of government

Prepare for labour scarcity

Develop smart immigration policies

Invest in education

Reinvest in the asset base

Increase raw material efficiency

Co-operate on a global basis

Remove the next Kondratiev wave

There is still time to act, provided leaders from all social sectors

government, business, organized labour, environmental and other

stakeholder groups [take firm and swift action] to secure future

economic prosperity, social cohesion, and political stability