Presented by: Eustace Davie, Director of Free Market Foundation On Free Market Foundation's submission of a Flat Tax system to Davis Tax Committee

1. The Flat Tax
South Africa should adopt
a low flat rate tax system
Free Market Foundation

2. Robert Hall and Alvin Rabushka
• 30 years of presenting and refining flat tax
proposal for USA
• Improve incentives to work, save, invest
and take entrepreneurial risks
• Save taxpayers huge amounts in direct
and indirect compliance costs
• Shift billions of dollars from tax-saving
investments to production

3. Nightmare of complexity
• Tax systems are complex and costly
• High direct costs of compliance
• Indirect costs of compliance – lost labour,
capital and total output
• Tax evasion – disrespect for other laws
• Tax avoidance – tax saved but output lost
(lawyers, accountants etc)

4. Flat Tax System
• Consumption Tax
• Income taxed only once
• Simple, easily understandable
• Radically reduce compliance costs
• Reduce tax avoidance and evasion
• Promote capital formation and growth

5. Benefits to be gained
• Eliminate economic distortions
• Broaden tax base and lower rates
• Replace depreciation complexity by
expensing asset purchases in year of
purchase
• Improve incentives to work, save and
invest

6. Exempt the Poor
• Exempt the poor – US example of
generous personal allowances
− Married filing jointly $16,500 (R140,000)
− Single $ 9,500 (R 80,000)
− Single – household $14,000 (R120,000)
− Dependants – excluding
spouse $ 4,500 (R 38,000)
(Rand conversion at PPP)

7. Enable small business
• Equal tax treatment for small and large
businesses
• Eliminate special allowances
• Exempt earnings of small business owners
through individual personal allowances
• End corporatisation tax benefits

8. Business Tax & Wage Tax
• Two taxes – Business Tax & Wage Tax
(same rate – US 19% - SA 15% ??)
• Two postcard-size tax returns
• No special allowances
• Fringe benefits not deductible by business
or taxable in hands of employees

9. Fundamental changes
• Capital equipment, structures and land
deductible when purchased, taxable when
sold
• Interest not business expense, not taxable
in hands of lender
• Tax act 3 1/2 pages vs. 2,000 pages tax
law - 10,000 pages of regulations (US)

10. Individual Tax Form
Form1 1995
Your social security number
Present home address (number and street including apartment number or rural route) Spouse’s social security number
1. Wagesandsalary 1
2. Pensionandretirementbenefits 2
3. Total compensation(line1plusline2) 3
4. Personal allowance
(a) q$16,500for marriedfilingjointly 4(a)
(b) q$9,500for single 4(b)
(c) q$14,000for singleheadofhousehold 4(c)
5. Number ofdependents, notincludingspouse 5
6. Pesonal allowancesfor dependent(line5multipliedby $4,500) 6
7. Total personal allowances(line4plusline5) 7
8. Taxablecompensation(line3lessline7, ifpositive, otherwisezero) 8
9. Tax (19% ofline8) 9
10. Tax withheldby employer 10
11. Tax due(line9lessline10, ifpositive) 11
12. Refunddue(line10lessline9, ifpositive) 12
Individual WageTax
Your first name and initial (if joint return, also give spouse’s name and initial) Last name
City, town or post office, state, and ZIPcode Your occupation
Spouse's occupation

11. Business Tax Form
Form2 1995
Employer Identification number
County
Principal product
1. Grossrevenuefromsales 1
2. Allowablecosts
(a) Purchasesofgoods, services, andmaterials 2(a)
(b) Wages, salaries, andpensions 2(b)
(c) Purchasesofcapital equipment, structuresandland 2(c)
3. Total allowablecosts(sumoflines2(a), 2(b), 2(c) 3
4. Taxableincome(line1lessline3) 4
5. Tax (19% ofline4) 5
6. Carry-forwardfrom1994 6
7. Interestoncarry-forward(6% ofline6) 7
8. Carry-forwardinto1995(line6plusline7) 8
9. Tax due(line5lessline8, ifpositive) 9
10. Carry-forwardto1996(line8lessline5, ifpositive) 10
BusinessTax
Business name
Street address
City, state, and ZIPcode

12. Costs of US Tax System
• Direct compliance costs, filing and buying
expert advice $100 billion
• Direct planning costs – lawyers accountants
etc $35+ billion
• Revenue lost to tax evasion $100 billion
• Tax avoidance distortions $100 billion
• Lobbyists $50 billion Total $385bn (61.6%)
• 1993 Total income tax receipts $625bn

13. The Flat Tax authors say…
The adoption of the flat tax would give an
enormous boost to the US economy by
improving incentives to work, save, invest
and take entrepreneurial risks. It would
save taxpayers billions in direct and
indirect compliance costs and shift billions
of dollars from tax saving to productive
investment.

14. Why flat tax not adopted?
Remember, there are thousands of
lobbyists in Washington, D.C., who work
full time to preserve tax benefits for their
interest groups and clients. They
contribute large sums to the two
congressional tax-writing committees.
They fiercely resist the flat tax because it
would put them all out of business.

15. UK & HK – GNI US$ per capita
UK Hong Kong
2009 35,260 45,320
2010 34,510 48,190
2011 35,270 51,450
2012 34,640 51,890
2013 35,760 54,260
(from 40% in 1960 to 152% in 2013)

16. Flat Tax & GNI US$ pc
Russia Estonia Mauritius HK RSA
2009 18,850 19,410 14,180 45,320 10,850
2010 19,910 19,460 15,120 48,190 11,200
2011 21,860 22,080 15,800 51,450 11,640
2012 22,710 22,900 16,540 51,890 11,970
2013 23,200 24,230 17,220 54,260 12,240
Growth 23.08% 25.29% 21.43% 19.70% 12.81%
Tax rate 13% 21% 15% 17%* 40%*

17. Other investment factors
South Africa (SA), Russia (RU), Brazil (BR)
• Govt. enterprises & investment (SA 4/37.70%,
RU 10/12.60%, BR 8/15.15%) [Ratings out of 10]
• Top marginal tax (SA 6/40%, RU 10/13%, BR 8/28%)
• Government consumption (SA 3.88/26.80%, RU 4.03/
26.30%, BR 4.26/25.50%)
• Business costs of crime (SA 3.16, RU 5.82, BR 4.13)
• Hiring & firing regulations (SA 4.43, RU 4.47, BR 2.23 )
• Capital controls (SA 0.77, RU R4.83, BR 3.08)
• EFW rankings (SA 88 RU 101 BR 102) – 152 countries

18. Thank You
Questions?