The best investment the South African government can make right now is to give more money to the South African Revenue Service.
A case for this is supported by a report produced last year by the US' Congressional Budget Office and a paper by two academics. Both made a case for the US government to pump more money into the Internal Revenue Service, which they argued would raise collected revenue by billions of dollars over decade.
Where the Congressional Budget Office is more modest in its proposed budget increases and projected revenue gains, Natasha Sarin (University of Pennsylvania) and Lawrence Summers (Harvard University) are, to use an American baseball expression, swinging for the fence.
Finding itself squeezed between rising debt and lower tax revenue, the South African government sought to create a breather by cutting expenditure, a game government has been playing for a while now. The most effective way of cutting expenditure would have been to make decisions - choices really - about what expenditure programmes to kill and which ones to keep going. But that's not the path government chose. It opted for cuts across the board. That's not all. It has made questionable choices about what to do with money shaved from other expenditure programmes. For example, it cut education and health expenditure and gave the savings to SAA.
There are two reasons why politicians opted for budget cuts across the board. The first had to do with the amount of work required in identifying government programmes that should be buried and those that require continued, if not increased, budgetary support. Related to the first, the second reason was that such choices can offend important political constituencies, especially within a governing party. So, discriminatory budget cuts require much political manoeuvring for which the appetite is very low.
Had government opted for a discriminatory approach to expenditure cuts, there would have been a very strong case for not only maintaining allocations to SARS, but increasing them significantly over 5 to 10 years. SARS receives its budget allocations via National Treasury. The money comes in two tranches. The first, and the biggest amount, is for operations, which pays for staff and other operating costs. The second is for information, communications and technology.
SARS has been allocated R8.6 billion for operations and R2.6 billion for capital (ICT) in 2021/22. The budget for operations is projected to drop to R8.26 billion in 2022/23 and R8.29 billion in 2023/24. The 2022/23 budget is close to the allocation SARS had for 2012/13 (R8.29 billion).
With resources that on average haven't increased much since 2012/13, SARS has to check every taxpayers' nook and cranny for possible additional revenue.
During these difficult fiscal times, the key to raising more revenue is having a good idea of how much tax revenue is out there that should be paid over but isn't. This is known as the tax gap. A working paper published by UNU-Wider last year estimated the tax gap in South Africa at about 11% of the potential tax base, or 2% of the country's Gross Domestic Product, a measure economic output, for the period between 2015 and 2017. For a projected R5.2 trillion economy, the tax gap would amount to about R105 billion this year.
That figure (in percentage terms) is not too far from the Internal Revenue Service's estimate of the tax gap in the US. The budget office said in last year's report that the IRS estimated the tax gap to have averaged US$441 billion annually from 2011 to 2013, about 2.7% of the US economy.
The CBO puts the tax gap down to three reasons. The first is the fact that not all taxpayers disclose everything about their tax liability, that is they don't report all of their income to the IRS. The second is about taxpayers not including full payment with their tax return. Lastly, some taxpayers don't file a tax return for all of the categories for which they are required by law, including individual, corporate, employment, estate and gift, and excise.
In the US, a substantial portion of the tax gap - an annual average of $381 billion out of the total $441 billion for 2011-2013 period - reflects the ability of the IRS to enforce the law. That talks to the capacity of the revenue authority. Hence, the proposals by the Congressional Budget Office report and the working paper by Sarin and Summers.
By CBO estimates, a modest investment of $20 billion over 10 years would raise revenue collection by $61 billion, and $40 billion would bring in $103 billion over the same period. Sarin and Summers, on the other hand, say that the CBO is too modest. They project that an investment of $64 billion in the IRS' enforcement activities could bring in $783 billion in additional taxes. Providing the IRS with an additional $43 billion would raise another $430 billion, taking the total increased revenue collection to over $1 trillion over a 10 year period.
A similar analysis is called for in the case of SARS, which will no doubt show that if government wants to rebalance its books there is no better investment than increased budget allocations to the revenue authority.