Now is an ideal opportunity for a bold approach to tax reform because South Africa is at a unique stage of its economic, political and social development, Michael Katz, chairman of the government's tax commission, says.
Katz was speaking in his personal capacity at a meeting of the Citadel/Personal Finance Investors Forum, in Gauteng, recently.
Outlining the objectives of tax reform, he said the correct degree of progressivity (where tax rates rise as income increases) must be attained, but redistribution of wealth would be better achieved through government spending on housing, education and health care, than through the collection of taxes.
Tax should not be too burdensome, Katz said, and the system should recognise the ability of people to pay their taxes. High rates of tax encouraged tax evasion and avoidance and choked off the incentive for people to work.
Reform of the personal income tax system in South Africa was necessary, because the lower income and middle income groups bore the biggest burden.
Tax policy can not be separated from tax administration.
"Ability to implement the right taxes is based on ability to collect them," Katz said.
Huge reforms had taken place at the South African Revenue Service over the past five years, but it still faced problems collecting taxes.
Administration must be efficient, predictable and not arbitrary, Katz said.
International investors looked for globally competitive tax rates and a predictable, fair tax administration.
The broadening of the tax base was necessary in order to lower taxes.
Tax reform in the Mbeki era would try to achieve a tax system which was cost effective, cheap to administer and cheap to comply with by taxpayers.
Taxes must be neutral. Decisions in the economy must be taken for business reasons, not for tax.
There must be no incentive to move from one form of business to another, or to make use of tax arbitrage, as there was in South Africa, with the relatively high rate of personal tax compared to corporate tax.
The tax system should have regard for small and medium businesses. Since big business and government could not employ a growing population, small and medium business was vital for providing employment.
But these businesses had trouble complying with tax laws and the burden on them should be reduced, he suggested.
The tax system should enhance savings.
A form of presumptive taxes was needed for activities which were hard to tax and where people or companies did not keep proper books of account.
The Katz Commission recently released its report on non-governmental organisations, which proposes support to NGOs (non-government organisations) through preferential tax treatment and donor incentives.
NGOs were a relatively cost effective means of delivering social and development services in a way that relieves the state of part of its financial burden, Katz said.
In societies such as South Africa, with gross disparities of income and wealth, NGOs were an important way of encouraging philanthropy and promoting equity and redistributive policies.