Is it right to pay tax when clean and safe hands are missing at the till?

Johannes Wessels (@johannesEOSA1)

SARS commissioner Edward Kieswetter’s biggest headache is not the gaping R300 billion crater in tax income this financial year or the growing Everest of assessed losses for companies that will impact negatively on CIT for years to come. His biggest problem is how to convince taxpayers to sustain a government that under the pretext of “a better life for all” has served up a toxic mix of corruption, wastage, mismanagement and anti-growth policies.

In addition, the very same government has doggedly pursued a lockdown strategy not underpinned by much logic that could yield any outcome other than a severe economic disaster with long term humanitarian effects. These effects include shortened lifespans, poverty related deaths, and deaths from medical conditions the government deemed non-essential. The toll of this inept strategy will in all likelihood dwarf the real Covid 19 death toll.

Lockdown has mowed down millions of jobs and several hundred thousand businesses. Those that survived have been severely crippled: they have a radically reduced income, have run up losses or have achieved less than half their previous taxable income.

One recalls the words of Saint Augustine, bishop of Hippo Regius in North Africa, whose theology and philosophy influenced ancient as well as modern thought: “Without justice, what are kingdoms but great bands of robbers?”

Tax compliance in a lockdown context

Far from the utopian NDP vision of a capable developmental state that would, through a public sector-led economy, roll back inequality and unemployment, the government has delivered a nightmarish reality of institutional decay and economic meltdown. Servicing public debt now devours more than double the tax share of 2009 at the same time that the collapsing tax base has placed SARS under greater strain.

Kieswetter therefore recently warned taxpayers: Do the right thing and pay in time, or face the consequences. He committed SARS to:

• Intensify its efforts to detect non-disclosure and to remind taxpayers to comply and correct their returns where necessary;
• Issue letters for late and outstanding returns and impose penalties immediately after the deadline has passed;
• Enforce administrative actions, including prosecution, if taxpayers fail to respond appropriately; and
• Name and shame those taxpayers convicted of criminal offences.

Will wielding the big stick work?

A December 2019 Discussion Paper for the European Centre for Economic Research by Armenak Antinyan & Zarah Asytryan (Nudging for Tax Compliance: a Meta-analysis) concluded that messages stressing the moral aspects of paying taxes are not effective in increasing compliance. Nudges that threaten taxpayers with audit probabilities and fines can be more effective, but the impact thereof is very small and of short duration. Their study considered more than 40 nudging interventions to encourage tax compliance.

Given the difficulty to persuade tax payers of the morality of paying taxes to sustain the SA government, this study may encourage Kieswetter to pursue a big stick approach.

However, the first results of a study assessing tax compliance under Covid and lockdown conditions have now emerged. In 2019 the Albanian Tax Authority joined the 202 other tax authorities that apply behavioural insights to shape policy and strategy. They designed a randomised controlled trial (RCT) to assess the effectiveness of communication “nudges” on the under-declaration of worker salaries in monthly payroll submissions by Albanian businesses.

The tax administration selected a sample of businesses suspected of under-declaring payrolls and designed letters with two different types of messages to be sent to the firms. The one highlighted the public goods nature of truthful payroll declarations and the other threatened enforcement actions if caught out committing tax fraud. Both letters were designed to gain behavioural insights and the randomly assigned firms were divided into three groups: a treatment group receiving the enforcement message, a treatment group receiving the public goods message, and a control group not receiving any letter.

The letters were sent out end February, with Albania implementing a lockdown mid-March that ended only at the end of May. This makes Albania the first laboratory testing the behavioural action of tax payers affected by lockdown. The result (Figure 1) reveals significantly higher payroll declarations in response to the public goods message than in the case of threats.

Is paying tax the right thing if it finances others to do the wrong thing?

In light of this insight SARS could probably gain more compliance by appealing to tax payers to do the right thing and that the moral high road would be full disclosure and compliance, since that would ensure services also for the poor. But would this message work in a time when taxpayers (whether through VAT, company and personal income tax or ad valorem duties) are utterly aware that they don’t get much bang for their buck?

They have been financing a government:

• that ensures that “the safe and clean hands that can be relied upon to look after the public’s finances” are missing “at the till” (See Auditor General’s most recent MFMA report )
• guilty of gross mismanagement of the police service, ensuring it remains ranked as one of the 20 worst in the world;
• incapable of keeping crime in check, with an average daily murder tally of 58 people a day;
• “dealing recklessly with public funds” as found by the Public Protector and
• that, under the masquerade of preparing for a deadly viral onslaught, embarked on social engineering sprees of abolition, class elimination, the trampling of individual liberties and muzzling citizens with masks whilst large portions of the “funds to fight Covid” were bankrolled in the latest (surely not the last) orgy at the trough.

The Auditor-General’s first Covid report provides sufficient evidence of wasteful expenditure on totally unnecessary quarantine sites and field hospitals in addition to overpriced PPE tenders with payments for goods that were not delivered or received.

Is it moral to pay tax if the gears of government are retooled not to serve the public good?

When the AG laments that the government is not taking his non-compliance findings seriously, it is late in the day. Of the municipalities only 38% had investigated all the non-compliance findings on supply chain management that were raised the previous year with 18% that had investigated some of the findings.  However, 44% did not investigate any of these findings.

Of those that did investigate all or some of these findings, 61% had satisfactorily resolved the issues but 39% did not. In some of these cases the municipalities failed to cancel contracts where employees had not disclosed their interests.

Non-compliance findings by the AG are ignored without penalties. That points to a deliberate decision by both the political and administrative leadership to shrug off accountability and to continue with the orgy at the trough.

This governmental culture and behaviour effectively nullify the argument that paying tax is the morally right thing to do. Yet tax compliance is the grease that keeps the gears of public service delivery going. If the gears are retooled to work in reverse, producing particular goods to benefit the few, and not public goods, the grease no longer serves its original purpose.

To enforce tax payments in the context that “if-you-don’t-do-it-you-will-be-fined” with little evidence of the government decisively breaking with its set path and culture to pursue its basic tasks effectively, the difference between paying tax and extortion money is getting very thin.

Such a blot on society

Whilst interfering incessantly in the private spaces and domains of individuals, associations and businesses, the government remains incapable of performing the Kindergarten tasks of government (maintaining law and order, limiting crime, ensuring impartial administration of justice).

To rephrase St Augustine: “Such a blot on society, assuming for itself the proud name of the government”.

Mr Kieswetter should direct his moral messages in the first instance to those on whose behalf he is collecting taxes. If not, he may transform into a modern-day version of the infamous sheriff of Nottingham (think Robin Hood…).

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• The Vandals are governing  
• Is government laying the table for a Boston Tea Party?
• The celebration of rampant incompetence
• Enterprises, unlike bears, don’t hibernate: lockdown will cause the death of firms and people