Wasted tax money affects willingness to pay

Mind-numbing revelations about state capture, corruption and the squandering of tax money seems to increase the unease of people to continue financing government spending.

The latest round of draft tax legislation published this month is overwhelmingly aimed at stemming tax structuring in favour of the taxpayer and tax avoidance, reflecting more non-compliant behaviour.

However, taxpayers are constantly reminded that paying their fair share is morally the “right thing to do”.

Patricia Williams, partner at law firm Bowman Gilfillan, says it is important to differentiate between “tax morality” and “willingness to pay taxes”.

She says the South African Revenue Service (Sars) routinely equates the two and appears to be of the view that adopting tax avoidance strategies is somehow “immoral”.

“In contrast, given our current economic and political climate, many taxpayers may be of the view that adopting tax avoidance strategies is not only commercially sensible, but also highly moral,” says Williams.

Taxpayers do not typically feel that it is “right” to finance government spending if this is perceived as being squandered.

Wayne Duvenhage, chair of the Organisation Undoing Tax Abuse (Outa), says South Africans’ public support and participation in paying taxes is generally high.

However, it is coming under significant attack, due to the crisis of legitimacy that the state finds itself in.

“The impact on the contract between the state and its taxpayers is immense if the state squanders and does little to hold transgressors to account.”

It gives license to the public to begin to question the conduct of government and to act in a manner which reduces state funding, which can be wasted.

This gives rise to civil society action which leads to litigation and protest action to put the state under pressure to correct itself, says Duvenhage.

Des Kruger, committee member of the South African Institute of Tax Professionals, says taxes are fundamental to the functioning of the state.

“Everyone who benefits from living in that state are duty bound to ensure its smooth operation, and the overwhelming majority of most citizens understand that social contract,” he says.

Taxpayers continue to be mindful of their obligations under the various tax laws and of the undesirable outcome should they fail to meet their obligations under those laws.

“That said, one certainly hears a lot of talk of a tax revolt because of the perceived misuse of tax monies, but I have not experienced the talk actually being actioned,” says Kruger.

Williams is of the view that there should not be an expectation of an overriding concept of “tax morality” that requires action beyond what the tax legislation requires.

“If the fiscus seeks specific behaviour from taxpayers, this should be clearly conveyed to taxpayers in tax legislation, interpretation notes and guides. People have a right to clarity and certainty around their obligations to the state and society, and this is just as true within the tax context.”

Williams says non-compliance in the form of resistance represents defiant and aversive taxpayers; disengagement in the form of taxpayers who do not want to be part of the system; and game-playing where taxpayers seek “loopholes” or other avoidance strategies.

In her experience there has been a significant increase in all three forms of non-compliance.

Kruger says tax avoidance and even evasion rises in direct proportion to the level of taxation. The phenomena is known as the Laffer curve – as taxes rise, collections rise, but there comes a point where increased taxes in fact result in less revenue. The individual tax rate (45%) is probably at its maximum before taxpayers will seek to earnestly evade or avoid their tax obligations.

“That said, it is important for the future of tax collection in South Africa that taxpayers believe they are getting value for their tax contribution or I fear that the talk of a tax revolt could become a reality,” says Kruger.

Williams says perceived unfairness or illegitimacy is a severe threat to the tax base, which cannot be addressed through attempting to improve technical or physical capacity at Sars.

Duvenhage says Sars’ efficiency and respect for the institution give rise to heightened compliance and effectiveness in collections.

However, skills are lost to the organisation when internal respect diminishes on account of the leaderships conduct.

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