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An Interpretation of Equity with Special Reference to Individual Tax Rates

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An Interpretation of Equity with Special Reference to Individual Tax Rates An interpretation of equity with special reference to individual tax rates S Kalideen orcid.org/0000-0002-4268-6042 Thesis submitted in fulfilment of the requirements for the degree Doctor of Philosophy in Taxation at the North-West University Promoter: Prof K Coetzee Graduation ceremony: October 2019 Student number: 25947494 ABSTRACT The primary aim of taxes is to collect enough revenue to finance public administration and affect redistribution of income especially in developing countries. Ideal tax reform strategies should include tax base broadening, rationalization of tax rates and an overhaul of the tax laws to address the issues of equity, efficiency and simplicity. Historically, taxation has enjoyed much favour with economists either analysing equity principles or searching for the optimal tax structure. Depending on the affiliations of the economists of the era, tax systems were either progressive or proportional and levied on income or consumption. Early economists raised the issue of equity while efficiency concerns were introduced later and the trade-off between these two principals were analysed to ascertain an acceptable compromise. The South African tax system has been frequently amended on a piecemeal basis resulting in individual taxpayers contributing proportionally more every year. When equity and efficiency requirements are seen to be lacking, taxpayers may feel aggrieved resulting in non-compliance. Recently personal income tax reform, particularly in the developing world has favoured proportional rather than progressive tax systems. In an effort to simplify their tax systems numerous countries, particularly those situated in Eastern Europe have adopted a version of the Hall-Rabushka flat tax. The adoptive jurisdictions have deviated from the recommended pure consumption based flat rate tax with a basic exemption to a fixed flat rate income tax to satisfy vertical equity principles. Although the flat rate income tax with a basic exemption proved to be the most popular, certain Nordic countries adopted a dual income tax system where capital income is taxed at a flat rate while labour income is taxed at a progressive rate. The resultant increased tax revenues, administratively simple, convenient tax reforms have prompted other developing countries to adopt variations of the flat tax system. This qualitative study is limited to the current South African personal income tax system and its resultant equity and efficiency consequences for individual taxpayers. The present tax rules encourage tax arbitrage which needs to be rectified. While further research into an improved personal tax system is advised the merits of the flat tax in its various forms should not be ignored. i TABLE OF CONTENTS 1.1 Introduction ...................................................................................................... 1 1.2 Background to the research area .................................................................... 1 1.2.1 Tax System Requirements.................................................................................. 4 1.2.2 Non-Economic Factors ....................................................................................... 6 1.3 Motivation and literature review ...................................................................... 7 1.3.1 Economics and Taxation .................................................................................... 9 1.3.2 Progressive vs Proportional Tax Systems ........................................................... 9 1.3.3 Flat Rate Tax .................................................................................................... 10 1.3.4 Other Tax Reform Proposals ............................................................................ 10 1.4 Limitations ...................................................................................................... 10 1.5 Problem statement ......................................................................................... 11 1.6 Objectives ....................................................................................................... 11 1.7 Research methodology .................................................................................. 12 1.8 Overview of chapters ..................................................................................... 13 1.9 Conclusion ...................................................................................................... 14 2.1 Introduction .................................................................................................... 15 2.2 Research methods and methodology ........................................................... 15 2.3 Objectives of research ................................................................................... 16 2.4 Scientific research methods .......................................................................... 17 2.4.1 Philosophical Assumptions ............................................................................... 18 2.4.2 The Research Onion......................................................................................... 19 ii 2.5 Research approaches .................................................................................... 21 2.6 Description of enquiry and broad research design ...................................... 24 2.7 Data collection ................................................................................................ 27 2.8 Quality and Rigour of the Research Design ................................................. 28 2.8.1 Reliability and Validity ....................................................................................... 28 2.8.2 Literature Review .............................................................................................. 29 2.9 Research ethics .............................................................................................. 30 2.10 Conclusion ...................................................................................................... 30 3.1 Introduction .................................................................................................... 32 3.2 Economic significance of taxation ................................................................ 33 3.2.1 Economics, Religion and Taxation .................................................................... 34 3.3 The first known taxes ..................................................................................... 39 3.3.1 Ancient Greeks and Romans ............................................................................ 41 3.3.2 Kautilya (371 B.C. – 283 B.C.) .......................................................................... 42 3.3.3 Western Civilizations ........................................................................................ 44 3.3.4 Eastern Medieval Scholars ............................................................................... 45 3.4 Early modern / western economists .............................................................. 48 3.4.1 William Petty (1623 – 1687) .............................................................................. 49 3.4.2 Richard Cantillon (1687? – 1734?) .................................................................. 49 3.4.3 Marshal Vauban (1633 – 1707) and Sieur de Boisguillebert (1646 – 1714) ..... 50 3.4.4 Francois Quesnay (1694 – 1774)...................................................................... 51 3.4.5 Anne Robert Jacques Turgot (1727 – 1781) ..................................................... 51 3.5 Classical economists ..................................................................................... 52 iii 3.5.1 Adam Smith (1723 – 1790) ............................................................................... 52 3.5.2 Later Classical Economists ............................................................................... 56 3.5.3 Socialism and Communism .............................................................................. 60 3.6 Later Economic Contributions....................................................................... 61 3.6.1 Marchese Vilfredo Pareto (1848 – 1923) .......................................................... 62 3.6.2 Knut Wicksell (1851 – 1926) ............................................................................. 63 3.6.3 Frank Ramsey (1903 – 1930) ........................................................................... 63 3.6.4 Arthur Cecil Pigou (1877 – 1959) ...................................................................... 63 3.6.5 John Maynard Keynes (1883 – 1946) ............................................................... 63 3.6.6 Joseph Schumpeter (1883 – 1950) ................................................................... 64 3.6.7 Neoclassical Overview ...................................................................................... 65 3.7 Twentieth century economists ...................................................................... 65 3.7.1 Friedrick von Hayek (1899 – 1992) ................................................................... 66 3.7.2 Jan Tinbergen (1903 – 1994) ............................................................................ 66 3.7.3 John Kenneth Galbraith (1908 – 2006) ............................................................. 67 3.7.4 Milton Friedman (1912 – 2006) ........................................................................ 67 3.7.5 Paul Samuelson (1915 – 2009) .......................................................................
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