We are at war. So say governments around the world. And business concurs, as do the international institutions. All also agree that wars costs money. Lots of money. In this case, mainly in belated upgrades to health services and the damage done to economies by a global enemy, Covid-19.
South Africa, with burgeoning debt, the biggest wage and welfare gap globally and grotesque levels of unemployment, has an appropriately named National Command Council (NCC) to plot the route to victory against this “invisible enemy”. NCC tactics so far have included the declaration of a national state of disaster with orders to lockdown, stay at home and observe social distance.
The NCC has also introduced bans on the sale and transport — even bottling — of alcoholic drinks, cigarettes and other tobacco products, in the process losing perhaps billions of rand in taxes and desperately needed export income. Dog walking, and recreational jogging or cycling outside of the home have also, controversially, been banned, along with the retailing of cooked food.
The overall effect, while perhaps slowing the advance of the Covid-19 enemy, has severely damaged the economy. The major question now is how the country — and the world — will be able to pay for this war once it finally ends, perhaps with the advent of a vaccine.
South Africa, as we are constantly being made aware, is in a particularly dire position, with SA Airways collapsing, and Eskom and other state-owned enterprises wallowing in debt. With post Covid-19 unemployment rates being predicted to rise above 50%, the spectre of mass starvation looms large although the country is still regarded as food secure.
It all comes down to how to finance any remedies, from a universal income grant to permanent top-ups of other social assistance and boosts to infrastructure spending. History actually provides a ready answer: if we are at war, why not apply the same measures used to finance the wars of the past?
Take World War 1, for instance where Britain levied an 80% tax on all corporate profits above pre war levels of generally 8%. A progressive rate of personal income tax was also introduced, rising from 15% to a top rate of 77%. Similar measures applied in the United States.
In a statement that should have particular resonance for us today, Britain’s Lord Chancellor, Lord Findlay, noted during the tax Bill debate in the House of Lords in 1918: “The Income Tax is a great weapon for war as well as for peace. It won the Napoleonic War for us, and it will win the still greater struggle in which we are now engaged.”
The economic lessons of that war, together with the Wall Street crash and the resultant ‘Great Depression’ of the early 1930s saw the economist, John Maynard Keynes, develop his theory of a managed market economy, with state intervention playing a role to mitigate the booms and slumps inherent in a private sector economy.
And it was the work of Keynes that saw the British government, at the outbreak of World War 2, adopt a progressive tax on both incomes and personal wealth. At its height, tax levels for the upper incomes of the very rich reached 99.25%.
After World War 2, super taxes — on the upper levels of income of the very rich — dropped to 90%, but still remained above 50% throughout the 1950s and 1960s as the post war economic boom took off. Ever onward and upward seemed to be the future for global economies and this saw some leading economists predicting the end of recessions, of the booms and slumps, of the past.
It was here that economist Milton Friedman and what is known as the “Chicago school”, came to the fore with monetarist policies favouring lower taxes and little government intervention. These policies, dubbed neo-liberal, were closely associated with prime minister Margaret Thatcher of Britain and President Ronald Reagan of the USA and rapidly spread around the world.
For the most part, those regions of the world that proclaim themselves to be democratic and capitalist persist with low tax regimes while wondering how to finance the Covid-19 war. Corporate taxes in South Africa, for example, topped 45% during the apartheid era, and now stand at 28% while the top rate for income tax is 45%.
This top rate applies to all taxable income over R1.5 million a year. But many — if not all — individuals paid more than this, usually also enjoy a range of tax-free perks, that do not apply to wage earners. So their annual declared income is at least marginally less than actual financial benefit.
According to the latest figures available, the top ten highest paid chief executives in South Africa received a total of R779.8 million in 2019. Heading the list, brewery boss (SAB Miller) Alan Clark took home R112 million, while, at tenth place, Sifiso Dabengwa of MTN had to make do with just R48 million.
Free marketeers and those still clinging to the Chicago school’s trickle-down theories have objected strongly to proposals to increase corporate taxes, let alone hike the rate for the rich and very rich. Investment, they say, will dry up; capital will flee.
But there is no evidence to support this: such ‘wartime’ corporate taxes would only be levied on companies making more than a set (10%?) profit. And while there are profits to be made, investment will continue while start-ups and small businesses would also benefit, being outside of this tax bracket. The wealthy will also retain their accumulated wealth while being paid sums that make for an extremely comfortable living.
So if we are truly at war, and the war has to be paid for, history has shown that, within our present system, taxation is perhaps the best place to start.