Is income tax constitutional?

This is due to several factors. Many laws predate the 1996 Constitution; others have been passed without thorough consideration of the constitutional parameters.

In other instances, technology or society has evolved beyond the laws’ intention or ability. A  universal failing of constitutional law is that there is no automatic review process,  sunset clauses or affordable and accessible ways to change unconstitutional laws.

Often, assuming the legal arguments are comprehensively presented, it is only after protracted and costly ultimate application to the Constitutional Court that laws can be altered or struck down.

The levying of taxation on income could be one of the more far-reaching unconstitutional practices – lawful, but unconstitutional nevertheless. If successfully challenged in the Constitutional Court, the South African government would have to forego or replace about R400 Billion annually – nearly 60%  of total annual government income(1) .

Alternatively, a two-thirds parliamentary majority (or 75% if the matter is deemed to contravene the Constitution’s Founding Provisions(A)) would be required to enact a Constitutional amendment allowing for the expropriation of private property without fair compensation. Either prospect would have far-reaching  consequences  for the taxpayer and for the country. But how can this be?

Income tax is levied under the authority of The Income Tax Act of 1962.  The Act enables (amongst other things) the appropriation of assets by the State, be they earned by a natural or juristic person. It differs from most other forms of asset appropriation by government in that it is a law of  general application meaning essentially that it applies to everyone.

In itself, the Income Tax Act and other money Bills are not unconstitutional. The Income Tax Act and regular amendments are passed by a simple majority in the House of Assembly, Council of Provinces  and in terms of  the relevant sections of the South African Constitution(2)

The question of the constitutionality on appropriating property via the Income Tax Act is found in the Bill of Rights, specifically section 25 which states in that “… no person may be deprived of property”.

It goes further, clarifying that where property is expropriated (by general application, for a public purpose and interest) it must be subject to ‘just and equitable compensation’ by the State to the property owner.

Finally, the section describes that for purposes of the Bill of Rights, property ‘is not limited to land’.(3)

The recognition by the South African Constitution of property not being limited to fixed land and buildings is proof of the modernity and clear thinking processes behind the Authors’ pivotal work.

Even mature democracies are silent or vague when defining general property rights. The United Kingdom has no formalised constitution, but derives its laws on property rights from a series of traditions, documents and court judgements.

The 5th Amendment to the US Constitution and resulting Supreme Court judgements enshrines property rights and compensation after seizure by the government, yet similar to the United Kingdom restricts itself to fixed land and structures.

In addition to the wider reaching definition of Property, the recognition of monetary income as one’s assets, capable of ownership, division, value and exchange is established in South Africa’s common law and jurisprudence.

The right to keep one’s property and not be deprived of its use is a cornerstone in maintaining a stable, democratic and free society – pillars on which the Bill of Rights in the South African Constitution is premised.

It is for legal minds to argue whether the right to keep what one lawfully earns could be limited by reasonableness and justifiability in an open and democratic society. But this limitation concept is dealt with in Section 36 of the Constitution and provides guidance as to when and how property rights may be abrogated and mitigated.

Legal minds must also apply themselves to which forms of tax could be unconstitutional. In this article we concern ourselves with an obvious asset appropriation – that of direct income tax .

There are myriad levies, tolls, royalties, surcharges, duties and encumbrance taxes imposed consistently on property, some hidden in regulated prices, others difficult to account for.

For instance,  it could be argued that Value Added Tax (VAT)  and Capital Gains Tax differ conceptually from income tax because they are consumption or transaction-based taxes. These are payable after the taxpayer has exercised  personal choice.

Estate duty as an unconstitutional appropriation may be easier to contextualise as this is a direct seizure of an asset, which perversely, is executed after the death of the property owner. Donations tax falls under a similar contextual debate (4) Whether a taxpayer receives just compensation for their appropriated income should form a critical part of the legal arguments.

Compare a low income family of 4 on an effective 12% income tax rate to the equivalent high income family on a marginal rate of 40%. Other than the questionable fairness of an increasing progressive tax rate, would a high income family utilise government health, education, transport and security services?

Conversely, a low income family may consume far more value in centralised government services than the income tax appropriated from them.

No doubt, the concept of denying the government 60% of its income base will have its share of critics.  Those in favour of socio-economic rights will voice concerns over how to finance a developmental state with substantial welfare obligations.

Conversely, modern economists will argue that returning R400 billion Rand  per annum to the individual and private sector is the quickest path to economic growth and prosperity for society in general. Revolutionaries may be disappointed to realise that the government can borrow a 60% budget shortfall for several years of deficit financing before it approaches the debt levels of South Africa’s major trading partners. Of course, Parliament may legislate additional methods of collecting income, but would need to be aware of the equitability of their actions on individuals – a rare experience given the track record of legislators in general.

All of this is finally dependent on an individual, group or organisation investing in the Constitutional Court challenge to the levying of income tax.

It is also dependent on good minds applying themselves to the engagement. There are no guarantees as to the outcome – Constitutional and upper Courts’ the world over often suffer from a lack of efficiency, timeous results and inability to rule pragmatically on complex issues.  .

But for the trusting taxpayer who loses up to 40% of their income through confiscation by government without just and reasonable compensation, the Constitution of this fine country may be a fateful document which finally protects their hard earned property.

 “It is impossible to introduce into society a greater change and a greater evil than this:  the conversion of the law into an instrument of plunder.” – Frederic Bastiat-
(1) SA Revenue Services (SARS) Published Annual Report 2010/11 – pages 11-13
(A) The Constitution of the Republic of South Africa, (Act 108 of 1996). Chapter 1(a) – ‘advancement of human rights and freedoms’ together with Section 74 (1) (a) and (b)
(2) The Constitution of the Republic of South Africa, (Act 108 of 1996). Chapter 4,  Sections 53, 73 – 77.
(3) The Constitution of the Republic of South Africa, (Act 108 of 1996). Chapter 2, Sections 25(1),(2), (4b)
(4) Budget speech and enacted legislation – 2011/12 South African budget.  It should be noted that many taxes in terms thereof have varying thresholds and limits which are situation and/or taxpayer dependent.