As we approach budget speech day on February 26, many are wondering what kind of rabbit Finance Minister Tito Mboweni is going to pull out of his hat this year.
Most commentators will talk about bracket creep, sin tax and a 1% increase to the VAT rate.
But the minister needs to start becoming a little more creative.
Bracket creep is the concept whereby the table which sets out the tax rates should be adjusted for inflation but is not adjusted.
The effect is that the person’s real after-tax cash income – assuming an inflationary increase in income such as wages – has less buying power than the prior year.
This approach has been taken for a number of years now, such that we now see South Africans starting to be taxed at 18% for each rand exceeding R79 000 (for this year), which is quite low in comparison with many other countries.
In the UK, for example, people only start paying tax on each pound exceeding £11 000 (R215 000).
In South Africa the table has a lot more brackets than the UK, and the climb in rates is steep so that by the time a person is earning more than R1.5 million every rand exceeding that amount is taxed at 45%.
This level is only reached at the pound equivalent of about R2.9 million in the UK.
Thus, South Africans who have taxable income of more than R79 000 are taxed more heavily relative to their foreign counterparts and the failure to address bracket creep means that income-earning South Africans become poorer each year.
This approach has been considered a necessity because there are so few people actually paying personal tax in South Africa.
Last year’s tax statistics tables show that in 2018 there were 21.1 million (19.9 million in 2017) people registered to pay personal tax, of which only 6.52 million were expected to actually pay any tax.
Tax statistics show that in the 2017 year just 249 599 people paid R162.8 billion in tax, which amounted to 58% of all personal taxes paid.
This in a country with more than 58 million people and almost 18 million people receiving government grants.
Against this background, we need to realise that we need to look after our 6.5 million individual taxpayers as they fund a significant portion of our public goods.
Unfortunately, in an environment where public trust in government is low owing to unfulfilled promises to address irregular and wasteful expenditure, they are becoming tired of bearing this burden.
An Auditor-General report last year showed yet another year where wasteful and irregular expenditure increased.
Consequently, many are engaging in a form of tax revolt by deciding to do easier or less work that results in less tax, to leave the country, or to engage in tax evasion – not a good space for any country to be in.
Although it is likely to happen, not addressing the bracket creep is a dangerous road for our government to go down.
An increase in VAT to 16% would provide a nice boost to the state coffers but such an increase would be unpopular as it would again result in working people effectively becoming poorer.
Sin tax – excise tax on products such as alcohol and cigarettes – is always a good target for the taxman, and it is inevitable that there will be increases in the taxes on these vices.
However, it will not fill the gap.
VAT is paid by everyone, as it is levied when people purchase goods and services, other than those few items that are zero-rated.
However, it has to be accepted that those with more money are likely to spend more and thus contribute the most to this tax category.
That is the same group of people already paying a lot of money to the government through personal income taxes.
Thus, although an increase in VAT to 16% would provide a nice boost to the state coffers – an estimated additional R15 billion to R16 billion, assuming that the economy doesn’t dip any more as a consequence of people tightening their belts even more – such an increase would be unpopular as it would again result in working people effectively becoming poorer.
So what other alternatives are there that can be immediately acted on?
For the man on the street, the best solution is to immediately and drastically cut government expenditure where it is wasteful and to adopt and implement a clear policy for economic growth.
Our finance minister has already tabled the needed actions which, although unpopular, could ultimately result in growth, jobs creation and a consequent increase in the number of people paying tax, which could subsequently alleviate poverty.
Sadly, these necessary actions seem to have fallen on deaf ears.
But what other rabbits could he pull out of his hat?
One option would be to re-impose a form of retirement funds tax, which was previously in place from 1996 to 2007 and was raising around R7 billion.
Tax was also raised when dividends were paid to retirement funds up until 2012, but this is no longer happening, although it raised around R5 billion a year.
Although the removal of these taxes was well argued owing to the need to incentivise retirement savings, perhaps their reintroduction would help to level the playing field between people who save through retirement funds and those who invest directly into shares and unit trusts.
And such taxes would be more palatable than the prescribed assets suggestion government keeps talking about, but knows is untenable for trustees of such funds if the monies are to be used to prop up flailing state-owned enterprises.
Another option could be to impose an undistributed profits tax.
Again, such tax has existed in the past. However, its effect is to force distribution of monies that companies may well need if the certainty and business confidence eventually comes for them to proceed with investment in the future.
Finally, the bandied about wealth tax might leave our minister’s lips on budget day. This would be a huge mistake as its only benefit would be sounding good from a political point of view.
We have wealth taxes – estate duty, donations tax, property transfer tax and securities transfer tax – which yield around R15 billion a year.
Studies show that any new wealth tax – an annual wealth tax is generally suggested to replace these – would come with the risk of collecting less at greater cost.
As always, the day is likely to be full of surprises. They need to be good ones this year if our country is to stop its downward trajectory.
- Tickle is a national tax operations committee member of the SA Institute of Chartered Accountants and an adjunct associate professor at the University of Cape Town