Picking up on the discussion around the impact of excessive taxation upon our top income earners (Q&A Wednesday April 16) Mr MM drew our attention to the Laffer Curve which is aptly named after Professor Art Laffer who was an advisor to President Reagan in the early 1980s.

Laffer pointed out the obvious fact that as taxes increased from fairly low levels, tax revenue received by the government would also increase. However, as tax rates rose, there would come a point where people would not regard it as worth working so hard. This lack of incentives would lead to a fall in income and therefore a fall in tax revenue. The logical end-point is with tax rates at 100% where, understandably, no one would bother to work and so tax revenue would become zero.

The view, of course, only holds water inasmuch as it applies to the wealthy. The lower income groupings probably could not afford to stop working until taxes reached very high levels... and in modern South Africa those lower groupings stretch right up the professional ladder. Once, a decade or two ago, it was normal for professional people, under the guidance of their tax advisors, to take an afternoon off during the week in order to contain their incomes within a lower tax bracket. Many would boast "Why should I work for the Government" in explaining this practice. Today, however, most professionals can be found working at weekends as well as putting in long weekday hours. And the younger ones have either emigrated or are actively pursuing that option.

Laffer might explain this by noting that in South Africa in the past decade income taxes have been progressively reduced which has encouraged this group to go back to work. Clearly he would be wrong, however. Talk to them and there is no doubt that economic necessity has driven them off the golf courses of South Africa. Taxes have been reduced, but the principal beneficiaries have been the lower income group while the professionals and those running small businesses have been burdened with the costs of staff UIF, training levies, municipal turnover taxes along with massive increases in rates, water, phone and electricity costs.

Furthermore. Most are probably earning relatively a lot less than they once were as a consequence of a protracted economic slowdown. If you doubt this ask your family doctor what car he is driving these days.

Turning to the wealthy for whom a few working hours more or less are neither here nor there, the expression of their tax revolt has been a worldwide trend towards exporting their capital to offshore tax havens. The great bulk of the world's private capital now resides outside of the tax jurisdiction of governments.

If you doubt this, go and take a look at the number of super yachts lying at anchor in the Mediterranean alone. Given that you need to be a billionaire to own one and that Forbes Magazine lists only 176 dollar billionaires in the entire world, then the private yacht test makes it clear that the sums do not add up. Last June I counted well over 176 super yachts in Antibes alone, not to mention Cannes, Nice, San Tropez and dozens of other harbours which are today so crowded with such craft that it is almost impossible to tie up there without prior arrangement.

The wealthy have voted with their feet with the result that the rest are having to come to the party and shoulder an ever-increasing tax burden. Furthermore, as the world's population grows exponentionally, the proportion of poor people grows in tandem.

Worldwide, governments seek to win votes by cutting taxes as, for example, President Bush is attempting to do right now in a desperate bid to escape the ignominy that his father suffered and being kicked out of the White House after just one term. In the process he is building a nightmarish fiscal burden for the US in the future which will only be solved by big tax increases or drastic economies. The latter is improbable for the cynical truth is that the business of politics is power and power can only be bought by the ability to dispense favours, which is why government development projects are usually located in areas where it is politically rather than economically expedient... e.g. the Coega Harbour project in the Eastern Cape... and such favours demand ever increasing sums of money. That is why, despite occasional periods of relaxation, taxes have risen steadily over time. And they will keep on rising.

The result will be that the wealthy will feel obliged to continue to seeking ways of minimising their taxes and the professional classes will continue to emigrate. Thus It does not take a genius to recognise that as this trend continues it will in time become impossible to maintain either democracy or those guarantees of basic constitutional rights such as education, health care, unemployment pay and old age pensions which countries like South Africa have so bravely written into their constitutions. They will become increasingly impossible to fund such luxuries.

This has in turn led to increased government activity aimed at curbing the practice and increasing pressure is being put upon places like Jersey and the Isle of Man. But they will fail for the simple reason that the tax havens make their living out of offering tax breaks to the wealthy and so the wealthy are guaranteed their silence which explains why the most foreign funds repatriation schemes fail. The most recent attempt to persuade their citizens to bring back their foreign investments is calculated to have been only 10 percent successful, and that despite guarantees a lot more attractive than South Africans have been offered lately.

There is another way: a social pact between the Government and the people which takes as its base the inverse of the Laffer Curve theory which states quite simply that the lower the rate of taxation the more willing people are to pay. So Cluver's solution is a constitutional guarantee of a flat rate of personal taxation set lower than the present minimum rate of taxation.

If that sounds impossible then you need to recognise that the way to calculate the total of all taxes collected by the government is to divide the official Gross Domestic Product by the total of the Government's General Revenue Account which, the last time I calculated it worked out at 32.6%. In other words, if you were Mr Average South African, the total of the income taxes, VAT, capital gains taxes, fuel levies, property taxes, stamp duties etc that you pay adds up to 32.6% of all that you earn. Since we are all paying 14% VAT, that means the sum of everything else is 18.6% which is very close to the 18% minimum rate of income tax for people earning less than R70 000 a year. Q.E.D. a whole lot of people are not paying the taxes they should and a small group is paying too much... the group seeking to emigrate or invest in tax havens.

Now the fact is that everyone pays VAT while less than one in four South Africans pays income tax. So it would not be unreasonable to levy a flat rate of 10% on everyone earning more than the current minimum taxable level of R20 000 a year. Then you could do away with ALL other taxes other than VAT.

Were South Africans constitutionally guaranteed such MAXIMUM rates of tax, this country would boom such as no other country in modern history has boomed. We would attract massive investment from abroad, unemployment would all but disappear.

Finally, noting that the 4 000 or so readers of this column make up the wealthiest category of South Africans, I would like to poll you to determine whether you would offer your unqualified support were such a plan introduced and, furthermore, would you so far as practical repatriate all money secreted abroad?

Obviously I will respect your anonymity, but if sufficient numbers of you respond bith for and against the idea, I will forward the statistics to Finance Minister Trevor Manuel.

Mr PA wrote: "Reading your interesting book "Making money from Mutual Funds" you mention a software program you used to run for mutual funds. I am sure that there are many people like myself on retirement with living annuities which provide the ability to switch funds. Have you considered perhaps adding a module to Share Finder to track, analyse and recommend mutual funds in a similar way to shares?. It would also be useful if the mutual funds were segmented into their sectors as is done for shares in the catalogue list.

ANSWER

It is on my wish list along with quite a number of other modules like a Warrants Trader etc, all of which will be released in a new composite programme we are now working on and to which we have assigned the working title ShareFinder Professional.

"A number of very interesting measurement techniques were discussed such as accumulated advance/decline index for top shares, high/low index etc that one does not find in share tracking software. This would add greatly to our ability to monitor the market. I have not yet found reference to these indexes in you latest book - is this because they are no longer in favour or have been superceded?

ANSWER

The Advance Decline lines are already available in respect of all the market indices in ShareFinder for those who use the Investordata download. You will find them in the Share directory where they take the prefix ADL. The other indices you mention fell between the cracks when we moven on from the old ShareFinder 2 to versions 3, 4 and 5 because we believed the new indices we had created since then were all far superior. However, ahen the dust settles on our current development programme, we will go back and review those old indicators and decide whether they are worth re-introducing or worthy of further development.