In 1996 Richard Musgrave, an American economist at the University of Michigan, coined the phrase “fiscal citizenship” in a critique of the book by Lawrence Zelenak, “Learning to Love Form 1040: Two cheers for the Return-based mass income tax”.
Musgrave was referring to the point made by Zelenak that “Taxation is a fundamental part of the social contract between a State and its citizens”. The concept is very important in that it makes clear that the contract involves both the State and its citizens, and both have to abide by the contract.
In years gone by paying taxes was viewed by citizens as being “an important part of belonging to a broader political and social community”. In fact, in the 1940’s immigrants to America were proud to pay their taxes, as it signified that they were truly now part of the country and what it had to offer.
Contrast this to the America we see today, where the ‘Tea Party’ group rallies against “excessive taxes and government spending” every April 15 (tax filing time).
The need for greater transparency
But America is not alone - all over the world we have seen a change in approach to taxes resulting in stronger enforcement by tax authorities on behalf of governments, and the need for them to demand increased transparency to facilitate this. Thus, we see the organisation of economic co-operation and development (OECD)’s base erosion and profit shifting (BEPS) action plan recommending, as a minimum standard, that multi-national entities with global revenue exceeding EU750mn be required to provide to their head office revenue authority, schedules of information demonstrating, for example, where revenue is earned and in which countries, what operations take place in each location and how many employees there are (and much more). This information is to be passed on to all other tax authorities mentioned on the schedule, who have signed up for the exchange of information.
For individuals and corporates, alike, the common reporting standards (CRS) will similarly provide information on bank accounts, held in countries outside the country of the residence of the holder, to the tax authority in the holder’s resident country.
And the call for transparency is ongoing with, for example, the European Union considering making the country by country reports public, as well as a call that beneficial ownership of companies should similarly be made public. This is presumably because studies have shown that compliance increases with transparency.
These measures indicate that the governments and tax authorities clearly do not trust their corporate and individual citizens to disclose their true positions, and to pay the correct amount of tax.
How did we get here?
From the position where taxpayers were proud to pay tax and thereby contribute to something worthwhile, to the position of paying as little as possible, legally or illegally! Let’s face it, without taxes we would not have roads, schools, law and order (a police force and judiciary), healthcare, and so on - the principal of public goods is an excellent one. And in a World where 0.7% of the population own 41% of the assets, it seems reasonable that those who have more should pay more to ensure these basic facilities for the rest - as Judge Holmes said “Taxes are what we pay for civilised society”.
The American “Tea Party” group, perhaps, sum it up in their annual tax return submission day rally against “excessive taxes and government spending”, mentioned above.
So, let’s look at where we are in South Africa. Although, as was pointed out in the Davis Tax Committee’s macro-economic report (issued on its website on 24 August 2016) South Africa has an effective systems for transfer of wealth from rich to poor, we still see a large portion of the population living in poor circumstances, and a simultaneously resentful tax-paying public, as taxes increase and the tax authority is forced to wield its powers to their fullest extent to force compliance, diminishing the relationship between the two.
Why is this?
The Tea party’s slogan hints at this as it infers that the State also has responsibilities: Per Musgrave, these are to “raise adequate revenue in a fair and effective manner” to satisfy government’s obligation to provide public goods and distribute fairly. Thus, as Musgrave says, there are “mutual and reciprocal’ responsibilities”. Achieving trust in government increases taxpayer morale, he says.
The South African Auditor General, Kimi Makwetu, issued his report on the performance of the South African government on 16 November 2016 and recorded that “Irregular expenditure has increased nearly 40% since 2013-14 to R46.36bn…” He advises that this increase was largely due to continued non-compliance with supply chain management procurement processes (a euphemism for corruption?).
Put into perspective, the R46.36bn represents R851 per person for each of the 54million people in South Africa in a year, or more than 65 loaves of white bread (500g) costing R13 each, per person!
As a consequence of taxpayers seeing their hard-earned money being used to enrich the few who are party to the mismanaged procurement processes, rather than the many that taxes should be used for in providing public goods (or even just loaves of bread), the trust between taxpayer and government is eroded.
So, how do we turn this around?
We have to each understand the phrase “Responsible tax”. The taxpayer, the tax administration AND the government have to be responsible in relation to the taxes to be paid, collected and spent. Only then will we truly see the level of fiscal citizenship increasing for the benefit of all South Africans.
by Deborah Tickle
Deborah has been with KPMG for 31 years. After qualifying as a CA she moved into the tax department and obtained her Honours in Taxation at the University of Cape Town. She has consulted in international and corporate tax since then and was appointed a Partner in 1996, and managing partner of the Cape Town tax department, in 2006. She...