It must be said, immediately, that these words are not directed against any officials of the South African Revenue Service, however much a few readers might consider them to be appropriate.
They were written in 1776 by Adam Smith, the Scottish economist, who lectured on logic and moral philosophy. His most famous work, of course, was An Enquiry into the Nature and Causes of the Wealth of Nations. His was the first major academic study of taxation (including customs and excise duties), which he premised upon the proposition that there is no art that one government sooner learns of another than that of draining money from the pockets of the people. In marked contrast to the reaction of readers to the title of this article, there will doubtless now be few readers who would disagree with Smith’s proposition.
Smith’s enquiry into taxation was founded upon the following four maxims, which Revenue officials and students of taxation alike would do well to remember:
- The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.
- The tax which each individual is bound to pay ought to be certain and not arbitrary.
- Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it.
- Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.
It was in the fourth context that Smith wrote that, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may subject them to much unnecessary trouble, vexation and oppression; and though vexation is not, strictly speaking, an expense said Smith, it is certainly equivalent to the expense from which every man would be willing to redeem himself. Amen to that!
To put the matter in context, in the United Kingdom the proportion of the State’s revenue from direct taxes in the 18th century was low. A great deal of the revenue at that time came from customs and excise duties, especially on wine and spirits. And, not surprisingly, there was enormous customs and excise evasion which excited the attention of the odious tax-gatherers.
Two hundred years later, in 1975, the report of Professor J E Meade into the structure and reform of direct taxation in South Africa confirmed Adam Smith’s treatise, as did the Margo Commission in 1986 under the chairmanship of the erudite Mr Justice Margo.
On a more light hearted basis, and in marked contrast to Adam Smith, readers should enjoy the work of the late Sir Alan Herbert, who was for many years a barrister and a Member of Parliament in England. A prolific writer of humorous material, in Wigs at Work published by Penguin Books in 1966, Herbert has a mythical taxpayer giving evidence in his own defence in court in a tax case brought against him by the Commissioner for Inland Revenue.
During cross-examination by counsel for the Commissioner, the taxpayer used a vivid though disrespectful figure of speech. Inland Revenue, he said, is like the barracuda, which prompted the judge to ask “Why the barracuda?” Herbert’s taxpayer, who is thought to be his alter ego, aggrieved at paying 47% income tax on his earnings and, two years later, a further 50% surtax on the same earnings responded: “The shark takes one of your legs and goes away M’Lord. The barracuda comes back and takes the other one”. The rates of income tax and surtax at that time were factual. In fact, in 1966, there was an additional investment income surcharge of 10% which brought the maximum marginal rate of tax, for that year only, to 107% for certain wealthy individuals. The surcharge was imposed just before the end of the tax year so as to prevent avoidance.
Thank goodness that the extortionately high rates of personal tax in South Africa and in Britain in the 1960s and 1970s are mercifully a thing of the past. Long may that continue!
Of course, the tax system in South Africa is by no means perfect and is still developing. While the profits from illegal transactions have always been taxable (see, for example, the early case in the Transvaal Provincial Division in 1918 of CIR v Delagoa Bay Cigarette Co Ltd) it is doubtful whether SARS has yet harnessed the tax from cyberspace crime.
Illegality poses a large number of tax problems. Money that an employee has embezzled from his employer has been held by the Supreme Court of the United States not to be taxable income in the hands of the employee, as he is legally liable to repay the money. Despite the liability to tax of many classes of unlawful gains, the US court held, in a subtle phrase, that “moral turpitude is not the touchstone of taxability”.
During the years of prohibition in the USA, a bootlegger claimed that the Fifth Amendment, which is directed against self-incrimination, entitled him not to file income tax returns and in the Circuit Court of Appeals he succeeded. However, the Supreme Court quickly overturned that judgment in 1927 in United States v Sullivan. “It would be an extreme if not extravagant application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime. It was suggested that if a return were made the defendant would be entitled to deduct illegal expenses such as bribery. This by no means follows, but it will be time enough to consider the question when a taxpayer has the temerity to raise it,” said Holmes J. Quite so.
Students that may be interested in pursuing this matter, in a strictly professional sense I hasten to add, will find learned comment in A Second Miscellany-at-Law by Judge R E Megarry QC, published by Wildy & Sons Ltd , London in 2006.
Penelope Webb, who for some years worked in industry, is a former tax partner of a large international accounting firm.