Evoking purpose in paying taxes

The Power of Voice in Stimulating Morality: Eliciting Taxpayer Preferences Increases Tax Compliance (C Lamberton, JE De Neve, MI Norton)

Taxes – the lifeblood of the government, yet an unwanted cost for no obvious benefit to most citizens. With COVID-19 strengthening is grip on South Africa combined with a recent Moody’s downgrade, our country needs revenue through taxes more than ever. How do we better align the taxpayer and government’s contrasting perceptions? The answer lies in tax morality – the willingness of individuals or companies to abide by tax laws and to pay their taxes.

As it stands, our tax expense is decoupled from any immediate benefit or satisfaction – this is perhaps an area that can be improved in South Africa. The rationale being that a person is far more likely to part with their hard-earned cash in return for something that can be seen or felt. The concept is not limited to tax and is a reason why, for example, so many people struggle with the concept of investing – there is no immediate gratification for your depletion in spending power.

In a research paper published by the Society for Consumer Psychology, it was found that allowing a sample of taxpayers to express preferences over how their tax was spent increased compliance by 16%. The paper suggested that if people could choose what their cash in tax would be used for, they would be less likely to avoid or evade tax.

In a South African context, the government’s five largest spends per the 2020/21 budget are basic education, health, social protection, community development, and debt-service costs. For many people this list may seem appropriate. However, to cultivate economic growth should we not spend more on innovation, science and technology? To reduce crime should we not spend more on police services. Every taxpayer is likely to have their own unique view on what government should spend their money on – why not give them the opportunity to take action on this view through participatory budgeting?

The concept of participatory budgeting is not new - it was first implemented in Port Alegre, Brazil in 1989 and by 2001 more than 100 cities in Brazil had implemented participatory budgeting, while by 2015, thousands of variations have been implemented in the Americas, Africa, Asia and Europe.

A particularly interesting variation of the concept, known as “Hometown tax”, is implemented in Japan. Hometown tax allows taxpayers to “donate” money to certain municipalities in exchange for tax deductions. In order to be an attractive municipality for donations, municipalities offer locally manufactured gifts in return for donations – thus spurring local industry and competitiveness between otherwise docile economic areas. The concept is certainly not without its flaws, but in a country like South Africa where young people leave their rural homes to study and build careers in the city; would this not be a plausible way to spark tax morality and ignite small business growth and employment in rural areas? To avoid the concentration of wealth in upmarket areas, this could be limited to poorer municipalities.

Over the past five years, government has implemented large tax increases. But the difference between projected and collected revenue has grown progressively larger in the face of a persistent slowdown in economic growth and a weakened SARS. The projected revenue shortfall for 2019/20 is R63.3 billion – significantly higher than the revised estimate of R52.5 billion published in the 2019 Medium Term Budget Policy Statement.

These shortfalls will not cease unless something is done to increase tax compliance. Penalties and punishment can only get you so far – tax morality cannot be overlooked. A system which allows a taxpayer to allocate even a small percentage of their taxes to a category of government spend* or a certain municipality recouples an expense with something tangible. In a country filled with proud and passionate citizens, evoking a sense of purpose in paying taxes is surely worth a try?

*On a side note: Government could of course reassign the unallocated tax revenue to the less attractive but necessary spends (i.e. debt-service costs) - the reward of knowing where a portion of your taxes is going would hopefully outweigh this.