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SA taxpayers profit from 25% tax-to-GDP limit

Ann Crotty

Taxpayers were benefiting to the tune of more than R125 billion a year as a result of the government’s “self-imposed rule” that total tax revenue be limited to about 25 percent of gross domestic product (GDP).

Dick Forslund, the chief economist at the Alternative Information and Development Centre (AIDC), said that the 25 percent peg limited the size of South Africa’s public sector and the scope for the government to provide services.

He said that the peg would have to be abandoned if the government wanted to finance National Health Insurance (NHI). He said the peg would have to be lifted to 27 percent “just to pay for the NHI”.

Yesterday, Adrian Lackay, the spokesman for the SA Revenue Services (Sars), told Business Report that there was no set policy position on the 25 percent peg. “At best a tax-to-GDP of 25 percent is a useful benchmark or guideline, but certainly not a policy stance.”

Earlier this week, it was revealed that tax revenue to GDP was below 25 percent in fiscal 2011/12.

Sars said while there had been a “strong recovery from the 4 percent contraction in tax revenue in 2009/10, tax-to-GDP remained depressed”.

Forslund said that the tax burden on people who paid personal income tax was much lighter than it was in 1994. The “exaggerated tax cuts” enjoyed by taxpayers each year meant that they paid R125bn less than if the 1994 rates prevailed.

“Since financial 2000 when tax rates for the top incomes were cut from 45 to 40 percent, the upward adjustment of tax brackets has… exceeded compensation for inflation.”

He said the approximately 4 million individual taxpayers received the greatest benefit from the government’s pegging policy with members of the higher income groups securing the greatest absolute benefit.

He said that it was possible to identify the origins of the 25 percent peg in the negotiated settlement ahead of the 1994 elections.

In 1996, Gear – the government’s economic growth strategy – said that the improvement in economic growth combined with improved tax administration should lead to a strong increase in tax revenue relative to GDP. “This will create… scope to effect further reductions in the rates of personal and corporate taxation, while maintaining a ratio of tax-to-GDP of about 25 percent,” it said.

And in February this year, the AIDC notes, Minister of Finance Pravin Gordhan said: “Key features of the budget framework include… tax revenue stabilising at about one-quarter of GDP.”

Forslund argued that the unnecessary limit on the tax take had curtailed the capacity of the public sector and created an over-reliance on the use of tenders. “The… policy brings the private sector into the game of tenders and this bloated system turns delivery of basic services and the building of social infrastructure into a costly for-profit endeavour.”

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