The real triple challenge: taxes, affirmative action and BEE
Wednesday, August 5th, 2015
By Piet le Roux, Head: Solidarity Research Institute
Government often refers to the so-called triple challenge of poverty, unemployment and inequality. The problem with this view is that all three of the above are consequences and not causes. The causes are to be found elsewhere, in the triple challenge of taxes, affirmative action and black economic empowerment.
The year 2015 is the year of retrenchments – from those at Evraz Highveld Steel, where more than a thousand employees have been affected, to those at Lonmin with its 4 500 affected employees. It is a year in which the economy is saying: We can’t manage anymore; the burden is too heavy.
Under such circumstances one would have expected that government might lift its heavy hand. However, instead of reducing intervention government intensified three of the things most harmful to the economy: taxes, affirmative action and black economic empowerment. All of these limit employment, economic growth and wealth in general.
In other words, taxes, affirmative action and black economic empowerment increase poverty, unemployment and economic inequality.
In his Budget Speech, delivered in February, Finance Minister Nhlanhla Nene, announced an increase in the top marginal tax rate from 40% to 41%. Although widely reported as the first increase in personal income tax since 1995, it is really one of many increases. As Paul Joubert has indicated in previous editions of this publication, the Treasury has, for many years, been increasing income tax invisibly through tax bracket adjustments out of step with the CPI.
Taxation is an extraction of resources from the private sector. The more government takes, the less there is to be used productively; the less disposable income consumers have; and the more the economy struggles.
Although affirmative action has been with us for a decade and a half, it is being applied more and more strictly. Recently, it was announced that government would start prosecution of 77 companies which, allegedly, failed to comply with the Employment Equity Act. Another 1 400 are to follow.
The announcement of prosecution coincided with the release of the Commission for Employment Equity’s 15th report which, as in the past, is fraught with fundamental flaws. None of the shortcomings highlighted in the past by Solidarity in the Labour Market Report and elsewhere – even in submissions to the commission – have been eliminated. According to Dirk Groenewald, Head of Solidarity’s Centre for Fair Labour Practices, the commission moreover acknowledges in this year’s report that the racial composition of the national economically active population cannot be the sole criterion for appointment practices; yet it continues to profess that it has to be the case.
The fact that government is now set to prosecute companies not complying with affirmative action requirements will intensify affirmative action’s economic burden. As Herman Mashaba recently put it: “… in the name of affirmative action the entire economy is being directed from Pretoria.”
To top it all, far-reaching new Black Economic Empowerment Codes (BEE codes) have come into effect in May. At a special conference organised by business organisation, AfriBusiness, heavyweights such as Russell Lamberti of ETM Analytics and Dr Anthea Jeffrey of the Institute of Race Relations highlighted the harm BEE causes. At the conference it was illustrated how the latest BEE codes will bring about a chain reaction of economic harm, especially in the downward supply chain of large companies. Major companies such as mines, banks, insurers and telecommunication companies are vulnerable as they are dependent on licences from government. To maintain their BEE points at high enough a level they have to do as much procurement as possible using “black” suppliers”. Large companies will thus severely pressure their suppliers to sell 51% of their shareholding to people who are neither white nor foreign.
Amid mounting retrenchment processes in the South African economy, government is thus in the process of escalating three of the most far-reaching demands it can make of the economy. Judging by the momentum of interventions, even further intensification might be looming.
Any one of the three challenges of high taxes, affirmative action and black economic empowerment would have been cumbersome enough on its own. Put together, they constitute a bale of hay on an already heavily-laden camel’s back.
No wonder the Solidarity-ETM Labour Market Index, which offers a measure of wage and job security, has been on the downward trend in recent years.