A winning idea?

The equation is simple: less tax + less red tape = higher profits = more jobs. Unfortunately, in South Africa, the opposite seems to be the norm.

Peter O’Halloran - Tax advice

Driving through the Karoo recently, I heard two interesting discussions on the radio. The first was a talk about the high unemployment situation in South Africa; the second dealt with how difficult it is to do business in this country because of the many hurdles that government places in the path of the small business owner.

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It was said that in South Africa, for every R1 a business makes in profit, the government, through taxes, levies and charges, extracts 52c. This leaves just 48c in the rand for capital investment.

When companies, especially small companies, are overburdened with both taxes and paperwork, as appears to be the case in this country, you get inefficiency. This is because money necessary for capital reinvestment and growth is not there for the business owner – it goes to government’s coffers.

Paperwork, meanwhile, spawns more paperwork, because, inevitably, people make mistakes and compliance tasks have to be redone. This makes employment of staff highly expensive.

Big business vs small business
Of course, big business is usually above these issues: it has the resources to cope with their administration and can also diversify offshore, reducing the tax burden. Indeed, these advantages are essential for its survival. Smaller businesses, by contrast, don’t have these luxuries and are more vulnerable.

Job-stifling legislation
A government should work for the good of the people. But in South Africa, government tends to thwart business initiatives, actually contributing to unemployment, both directly and indirectly. It doesn’t help, moreover, when government officials who have zero business acumen make laws to regulate business.

As I drove, it came to me that a government can never be cured of making unnecessary laws – that is the job of a government, after all, and officials’ livelihoods depend upon it. Inevitably, any request to cease such activity will fall on deaf ears.

The problem is that business requires capital. Lending is not the answer, because the lender exposes itself to unnecessary risks. It is far better for the business owner to save money in the business account. But, as explained above, this is next to impossible due to unacceptably high taxation.

What might work, though, is a change in the law whereby the tax authorities allow businesses, especially small businesses, to accumulate a nest egg at low or no tax. This nest egg could perhaps be the equivalent of annual turnover. Apart from helping businesses to save, it would encourage full compliance and full reporting of income.

Cash-flush small businesses would be healthy businesses. They would be likely to employ more people. They would inject money into the economy as they recapitalise, purchase new machines and gear themselves up, and all this would help to stimulate the growth so desperately needed.

Such growth would in turn generate more taxes. A win-win-win situation.