Minister Tito Mboweni needs to think outside the box
“Bracket creep” is the concept whereby the table that sets out the tax rates should be adjusted for inflation, but is not adjusted. The effect is that a person’s real after-tax income (assuming an inflationary increase in income) has less buying power than in the prior tax year.
This approach has been taken for a number of years, such that we now see that South Africans start to be taxed at 18 percent for each rand exceeding R79 000 (for 2020), which is low in comparison to many other countries. In the UK, for example, people start paying tax on each pound exceeding £11000 (R215 000).
In South Africa, the table has many more “brackets” than in 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 percent. This level is only reached at the pound equivalent of about R2.9m 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.
Few bear the burden
This approach has been considered necessary because few people pay personal tax in South Africa.
The 2019 tax statistics tables show that in 2018 21.1 million (19.9 million in 2017) people were registered to pay personal tax, of which only 6.52 million were expected to pay any tax. This in a country with more than 58 million people and almost 18 million people receiving government grants.
We need to look after our 6.5 million individual taxpayers, as they fund a significant portion of our public goods. In an environment where public trust in the government is low due to unfulfilled promises to address irregular and wasteful expenditure, they are becoming tired of bearing this burden.
The auditor-general’s report in 2019 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, leaving the country, or engaging in tax evasion. Thus, although it is likely to happen, not addressing the “bracket creep” is a dangerous road for the government to go down.
Taxes on alcohol and cigarettes are always a good target for the taxman, and it is inevitable that there will be increases in the taxes on these vices. However, they will not fill the gap.
VAT is paid by everyone, as it is levied when people purchase goods and services (other than those few that are zero-rated).
It has to be accepted that those with more money are likely to spend more and thus contribute the most to this tax category - in other words, 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 percent would provide a nice boost to the revenue coffers (it is estimated a further R15bn to R16bn, assuming the economy doesn’t dip further as a consequence as people tightening their belts even further), such an increase would be unpopular, as it would again result in working people effectively becoming poorer.
What alternatives are there that can be immediately acted upon? For the average person, the best solution is immediately and drastically to cut government expenditure where it is wasteful or not really needed and to adopt and implement a clear policy for economic growth.
The 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. These necessary actions seem to have fallen on deaf ears.
New (or old) taxes
So, what other rabbits could the finance minister pull out of his hat? One option would be to reimpose a form of retirement funds tax. Such a tax was in place from 1996 to 2007, when it was raising about R7bn a year. It was also raised when dividends were paid to retirement funds up until 2012, but this is no longer happening, although it raised about R5bn a year.
Although the removal of these taxes was well argued due 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 the 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 would be to impose an undistributed profits tax. Again, such taxes have existed in the past. However, their effect is to force distribution of monies that companies may need if the certainty and business confidence eventually comes for them to proceed with investment in the future.
Finally, the bandied about term “wealth taxes” might leave the minister’s lips on Budget Day. This would be a huge mistake, as its only benefit would be to sound good from a political point of view.
We have wealth taxes - estate duty, donations tax, property transfer tax and securities transfer tax - that yield about R15bn a year.
Studies show that any new wealth tax (an “annual wealth tax” is generally suggested to replace these) would come with the risk that less would be collected at greater cost.
As always, Budget 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.
Deborah Tickle is a member of the national tax operations committee at the South African Institute of Chartered Accountants and an adjunct associate professor at the University of Cape Town.