EXTRACT | ‘The Dirty Secrets of the Rich and Powerful’ by James-Brent Styan

From the bestselling author of ‘Steinhoff: Inside SA’s Biggest Corporate Crash’ comes a revealing new exposé asking: are companies and billionaires more powerful than governments?

29 October 2024 - 11:14
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'The Dirty Secrets of the Rich and Powerful: Exposing the Dark Side of Capitalism' by James-Brent Styan.
'The Dirty Secrets of the Rich and Powerful: Exposing the Dark Side of Capitalism' by James-Brent Styan.
Image: Supplied

ABOUT THE BOOK 

A new billionaire is created every two days. Meanwhile, one in four South Africans live on less than R18 per day, which is barely enough to buy a loaf of bread. Is this the price of progress? What does it mean for the world we live in today, and can anything be done about it?

In The Dirty Secrets of the Rich and Powerful: Exposing the Dark Side of Capitalism, James-Brent Styan, one of South Africa’s bravest independent writers, explores the phenomenon of global inequality and unveils the secrets of influence and power dictating people’s lives.

He revisits the collapse of Steinhoff after the death of Markus Jooste, investigates the way company shares are manipulated, and unpacks the tax games the powerful play.

The Dirty Secrets of the Rich and Powerful asks difficult questions ranging from why medicine is so expensive to what are the risks of renewable energy. It is a fearless exploration of why the growing inequality between rich and poor should be a cause of concern for all of us.

EXTRACT

DONALD TRUMP, THE ROYAL FAMILY AND CORPORATE TAXATION


TAX RATES

Between 1985 and 2018, the global average rate of tax for companies fell by more than half, from 49 per cent to 24 per cent. Then it fell some more, helped along in 2018 by US president Donald Trump’s Tax Cuts and Jobs Act, the largest overhaul in US taxation in 30 years. The Act saw the nominal federal corporate tax rate in the US drop from 35 per cent to 21 per cent.

That same year, American economist Joseph Stiglitz stated that the global tax system allowed people, legally, to avoid paying tax, and French President Emmanuel Macron warned against a “race to the bottom on taxes and regulation”.

The US tax cuts simply added more cream on top for many who were already paying the bare minimum. Not only big corporates benefitted from the falling tax rates of the past three decades, but also super-wealthy individuals, such as Amazon founder Jeff Bezos, who paid zero taxes in 2007 and 2011, and Tesla founder and Pretoria-educated rocket man Elon Musk — the richest person in the world as of December 2023 — who managed to do the same in 2018.

The phenomenon is not limited to the US. The British royal family voluntarily pays income tax but is exempt from most other taxes non-royals must pay, including inheritance tax. When Queen Elizabeth II died in 2022, her son, King Charles III’s, private inherited fortune was estimated to be £1.8bn. He inherited assets including diamond jewellery, paintings by Monet and Dalí, Rolls-Royces, racehorses and rare stamps, and he paid zero inheritance tax on any of it. The new king was able to receive his mother’s wealth free of any contribution to the public purse.

The royals didn’t pay income tax either, until Queen Elizabeth II reached a highly preferential agreement with Prime Minister John Major’s Conservative government in 1993. According to that deal, the queen agreed to voluntarily pay income tax on her private income, but an exemption from inheritance tax remained in place for bequests between monarchs. This simply incentivized the Windsors to funnel all their wealth through the line of succession, and there is no doubt that this has greatly enriched the new king.

SOUTH AFRICA’S TAX RATES

South Africa’s historic corporate tax rates make for interesting reading. From 1980 to 1982, the rate was 40 per cent. In 1983 and 1984, it was 42 per cent, and from 1985 until 1991, it was 50 per cent. In 1992, as apartheid ended, the rate decreased to 48 per cent. In 1994, at the dawn of democracy under President Nelson Mandela, the corporate tax rate in South Africa was dropped to 40 per cent. During his term in office from 1995 to 1999, the rate was held at 35 per cent. At the start of Thabo Mbeki’s first term, in 1999/2000, the rate dropped to 30 per cent. It was reduced further in 2005/6 to 29 per cent, and yet again in 2008/9 to 28 per cent under the Jacob Zuma administration.

In 2022, in the wake of Covid-19, President Cyril Ramaphosa reduced the rate even further, to a record low of 27 per cent. The state was desperate to encourage growth in the private sector, which, in turn, would provide much-needed relief to South Africa’s massive unemployment crisis. Two years later, the impact of this decision remains difficult to judge given continued record unemployment numbers in the country and an increasing government deficit.

Why are corporate tax rates falling? The main argument is that dropping income tax rates grows economies. As the world becomes a global village, tax rates are one way for countries to attract and retain investments, factories, technology and skilled labour, all of which contribute to economic growth and development. By cutting corporate tax rates, countries can attract more machines, plants and equipment, which makes workers more productive and boosts their wages. This theory was behind the decision by the US government to cut its corporate tax rate from 35 per cent to 21 per cent in 2018.

Reducing corporate tax rates can certainly have positive economic effects, but it can also backfire and lead to revenue shortfalls for governments, which, in turn, have an impact on public services. The key consideration for governments when it comes to corporate taxation is achieving a balance between attracting investment and ensuring that corporations contribute their fair share of taxes to support public services.

It is also necessary to consider the impact of globalisation. As corporations increase their presence around the globe, their influence and the complexities of their businesses grow. For decades, many of these corporations were active only regionally. In 1980, for example, only six of the 20 largest supermarkets based in Europe today were operating stores outside of their domestic market. By 2000, all but one of these had internationalised their store network.

Today, French supermarket group Carrefour and US supermarket giant Walmart operate in 34 and 29 countries respectively. South African retail businesses have similarly expanded their footprints, with varying results. The Shoprite group mimicked the global business model and expanded first from urban to rural areas, and then to neighbouring countries. Today, it operates 3,326 stores across 10 African countries and recorded a trading profit of R11.9bn in 2023. The complexities involved in managing the taxation of corporations whose businesses span the globe cannot be underestimated.

It is critical to bear in mind that prudent businesses need to grow their capital. They need to make money to expand. Businesses reinvest the profits they make in new developments, expansions and takeovers, which, in turn, leads to increased job creation, growth in capital and, eventually, more tax. If companies do not make sufficient profits, the rest of the equation doesn’t work.

Like most developing countries, South Africa is fiscally constrained and heavily reliant on income from corporate taxes, which is why the corporate tax rate is considered to be relatively high. According to research published by the Organisation for Economic Co-operation and Development (OECD) in 2022, the average statutory corporate tax rate among more than 100 jurisdictions was 20 per cent, compared to South Africa’s 27 per cent.

A lot of these taxes are used to fund programmes aimed at addressing extreme poverty. There is evidence that the level of extreme poverty in South Africa has declined somewhat since 1993. This reduction was significantly influenced by social grants introduced by the new political dispensation. The total number of social-grant beneficiaries grew from 2.4-million in 1996 to just under 16-million in 2013. By 2023, national government was paying out 26-million grants every month, at a cost of around 11 per cent of the total annual budget.

In 1994, the government spent R10.5bn on social grants. By 2022, the figure had ballooned to R232.7bn. According to the International Monetary Fund (IMF), these grants can cover about 60 per cent of household expenditure for the poorest 20 per cent of the population. And they are only possible thanks to tax-based redistribution to poorer households, which is why the country remains so dependent on tax income …

In 2021/22, total tax revenue in South Africa constituted 24.9 per cent of GDP, which is substantially below the OECD’s average of 34 per cent. That year, corporate income tax made up 20.7 per cent of total taxes collected. Personal income tax was the largest contributor to tax revenue with a contribution of 35.5 per cent, while VAT was the second-largest source of tax revenue at 25 per cent.

A problem for the South African government is that there aren’t that many taxpayers. For the 2021/22 tax year, there were 23.9-million registered taxpayers in South Africa. In 2023, the country had an estimated 37,800 high-net-worth individuals, people whose net worth is at least $1m (R18.4m). In March 2022, there were 3.5-million companies registered for tax, but only 1,028,832 were assessed; the remainder were deemed inactive or dormant. Out of those that were assessed, only 21.4 per cent reported a positive taxable income. More worrying is that only 371 large companies (0.2 per cent of those with positive taxable income) had a taxable income of more than R200m. Those 371 companies were liable for 57.1 per cent of the total corporate income tax assessed that year.

In recent years, an increasing number of South African companies and individuals with power and resources have moved their holdings offshore. While some analysts rightly point out that South Africa’s hostile political climate and persistent attacks by the government on ‘white monopoly capital’ have contributed to this capital flight, another motivating factor is the country’s high tax rates and cost of capital. It is no coincidence that the places where they are moving their money to have lower tax rates.

This falls on the spectrum of progressive tax avoidance. It is one thing to apply your mind to reducing your tax bill, by claiming back medical expenses, for example. But it is another thing to explore and exploit every legal and technical loophole in order to pay as little tax as possible. There can be little doubt that the rich and powerful — who have the means — fully understand the dynamics of tax avoidance. They are also in a unique position given their access to the knowledge economy that is driving global growth.

By playing largely within the rules – it is perfectly legal to try to avoid paying tax – they continue to enjoy record increases in wealth. It’s estimated that super-rich individuals are hiding as much as $7.6-trillion from tax authorities around the world using mechanisms called tax conduits and tax havens. When you add the corporates that are also hiding large profits offshore, developing countries are being deprived of an estimated $100bn in tax revenues a year.

Extract provided by Penguin Random House


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