Don’t tax interest income, says Absa

Farmers who use their own money to run their businesses and those who plan to retire on the proceeds of fixed deposits will surely back a suggestion from Absa’s economic researchers that finance minister Trevor Manual should abolish taxes on income from interest.
Issue Date: 13 April 2007

Farmers who use their own money to run their businesses and those who plan to retire on the proceeds of fixed deposits will surely back a suggestion from Absa’s economic researchers that finance minister Trevor Manual should abolish taxes on income from interest.

The bank’s economists contend that tax concessions that benefit personal saving are hampered more by lack of political will than by fiscal considerations as household saving has plummeted to such low levels that the state would lose very little by not taxing it. According to Absa the argument becomes even more compelling considering that all income on individuals amounts to legalised confiscation in SA as taxpayers see so little return on the taxes they pay – services rendered by government departments are appalling and crime is rampant. They also effectively pay twice – first when they receive their salaries and again when they earn interest on that money. An environment in which personal saving is free of income tax will simplify the tax system, have social benefits, and would make it possible for the country to establish itself as a tax haven, in line with current Australian policy, the bank notes.

Apart from this there is a global move towards more government reliance on indirect taxes instead of direct taxes. Examples are green taxes on fuel products, motor vehicle licenses and air tickets. he researchers say while SA’s economic growth has been fuelled by high commodity prices and inflows of foreign money, the country still suffers for a shortage of domestic capital.

Normally the emergence of a significant new middle class is associated with a surge in savings deposits kept with banks, but this is not happening here. Instead, thrift has gone out of fashion and SA still has 16 million unbankable people. SA’s tax system makes consumption today more attractive than saving for tomorrow, the researchers say.

Countries with relatively low national saving rates have correspondingly poor investment records unless their savings can be supplemented by high net inflows of foreign capital. China, with a 10% growth, has a national savings rate of nearly 40%. – Roelof Bezuidenhout