NHI could be a tax squeeze
The small size of the tax base is the most difficult issue that will have to be addressed in finding a way to fund National Health Insurance (NHI) by way of a compulsory contribution, an actuarial science professor warns.
A large proportion of the country’s taxpayers is concentrated in the middle-income group with a taxable income of R150 000 to R300 000 a year, Professor Heather McLeod, Extraordinary Professor in the Department of Statistics and Actuarial Science at the University of Stellenbosch, says.
If a compulsory NHI contribution is introduced on a sliding scale at a rate of between one and eight percent of taxable income – the rate proposed by the African National Congress – middle-income earners may have to be taxed at the higher end of the sliding scale to raise sufficient revenue, she says.
A sliding scale contribution rate with eight percent applying to taxpayers who earn more than R150 000 would have raised only R53 billion in the 2009 tax year but could mean a tax increase of 50 percent for middle-income earners, McLeod says.
The Department of Health estimates there would be a gap of R50 billion between the cost of funding NHI and what it projects it will spend on health care by 2025 (see “NHI shouldn’t cost you more than you’re already paying”, below).
The amount raised by the skills development levy in 2009/10 shows that a tax at one percent of payroll raises about R7.8 billion. But a payroll tax excludes a significant portion of income that taxpayers earn from sources other than remuneration, McLeod says.
In a paper entitled “The tax base in South Africa”, McLeod says much work needs to be done to determine how best to fund the national health system and NHI in the future. The paper is the latest in a series of NHI policy briefings sponsored by pharmaceutical industry association Innovative Medicines.
The question of how to pay for NHI and how to spread the payments across different income groups is likely to be contentious, McLeod says.
Careful thought needs to be given to how the payments are structured to avoid overburdening certain income groups, she says.
Trade unions, employers and other stakeholders should be considering the problem now in order to be able to provide informed feedback once the funding proposals are made public, McLeod says.
The government released its green paper on NHI earlier this month. The paper indicates that the funding required for NHI may be low in its initial phases, but, as the system expands, estimates show that the gap between the health budget and the amounts required for NHI will grow.
The costing estimates in the green paper indicate that the government will need R125 billion in 2012, R214 billion in 2020 and R255 billion in 2025 if NHI is implemented gradually over 14 years.
Di McIntyre, a professor in the Health Economics Unit at the University of Cape Town, says the government has already budgeted to spend over R120 billion on health services in the 2012/13 financial year. This budget will be redirected to NHI, but in future years, as the gap between the budget and what is required widens, the funding of NHI will become a much bigger issue.
An analysis of how the tax base is structured reveals just how difficult it will be to make mandatory contributions for NHI affordable, McLeod’s paper says.
The paper’s analysis of the latest statistics from the South African Revenue Service (SARS) and the National Treasury for the 2009/10 tax year show that, at 34.3 percent, personal income tax is the biggest source of tax revenue for the government. The two other major sources are company tax (22.5 percent) and value-added tax (24.7 percent). In the 2009/10 tax year, all individual taxpayers collectively contributed an average of 22 percent of their taxable income by way of personal income tax.
McLeod says the statistics show that although only 9.4 percent of the 5.9 million South Africans who pay personal tax have a taxable income of more than R400 000 a year, they account for 38.3 percent of the taxable income and 54.6 percent of the personal tax assessed by SARS.
Income taxes are already heavily skewed to the highest income groups, McLeod says.
The taxpayers who have a taxable income of less than R150 000 a year make up 55 percent of the number of individual taxpayers, but they contribute only 9.6 percent of the tax assessed. The remaining personal income tax is paid by taxpayers in the R150 000 to R400 000 tax brackets.
People with a taxable income of between R150 000 and R200 000 a year pay 15.1 percent of their taxable income in tax, while those with a taxable income of between R200 000 and R300 000 pay 18.9 percent of their taxable income in tax.
McLeod says an ANC policy document on NHI last year suggested that NHI contributions be paid on a sliding scale, from less than one percent of taxable income for the lowest earners to seven to eight percent for the highest-income earners. A sliding scale structured in this way would have raised R41.8 billion in the 2009/10 tax year – an additional six percent of the total taxable income of all individual taxpayers, she says.
A scale more geared to where most taxpayers are concentrated, with taxpayers on a taxable income of R150 000 or more paying eight percent of their income in NHI contributions, would have raised R53.6 billion, or 7.7 percent of the total taxable income paid by individuals in the 2009/10 tax year.
However, McLeod says, it would be a substantial burden to these families if they were expected to contribute an additional eight percent of taxable income to fund NHI, as suggested by the ANC’s proposals. It would effectively increase the tax burden of the largest two groups of taxpayers – those who earn from R12 500 to R25 000 a month in taxable income – by some 50 percent.
However, Dr Anban Pillay, the Department of Health’s cluster manager for financial planning and health economics, says the intention of the ANC’s proposal was to split the sliding scale contribution of one to eight percent between the employee and the employer.
If a tax of an additional one percent of taxable income had been implemented in 2009/10, it would have raised R7.005 billion in that tax year, McLeod says.
Levying the NHI tax as a percent of payroll, as opposed to a percent of taxable income, would make a substantial difference to whom would be affected, McLeod says. A tax charged on a payroll basis would exclude other forms of earnings, such as commission, rental income, interest and investment earnings.
SARS statistics from last year show that salaries, wages and remuneration made up 66.7 percent of taxable income. The remaining 33.3 percent was made up of annual payments, directors’ income, commission, overtime, and interest and rental income.
TAX CREDITS FOR MEDICAL SCHEME COSTS TO BE PHASED IN FROM 2012
The revised tax deductions for medical scheme contributions and healthcare expenses will be phased in over the next two years and will remain in place for the near future, the National Treasury says.
In June, the National Treasury released a discussion document on the proposed changes to the tax deductions – principally changing the rand-based deduction you can claim for medical scheme contributions to a tax credit or rebate pegged at 30 percent of the rand amount.
The treasury says it is aware that the National Health Insurance (NHI) green paper released by the Department of Health earlier this month proposes phasing out the deductions. But, the treasury says, any decision in this regard would be part of a medium-term package of reforms to fund the additional requirements of the roll-out of NHI.
The treasury says it may be necessary to review the revised medical tax credit once NHI is fully operational – which at this stage is likely to be in 14 years’ time.
Heather McLeod’s paper “The tax base in South Africa” says the South African Revenue Service’s 2008 statistics show that employers paid contributions of R6.2 billion to medical schemes for about 55.2 percent of taxpayers who enjoyed a taxable fringe benefit.
In its discussion document on the tax credits, National Treasury puts the tax benefit enjoyed by taxpayers as a result of the medical deductions and exempt contributions at R15.7 billion in the 2008/9 tax year. Should the green paper policy be implemented, what it costs the government to provide you with the deductions is likely to be used to fund NHI.
McLeod says the statistics show that 70 percent of taxpayers who fall in the income groups of between R150 000 and R500 000 a year use the medical expenses deductions.
Currently, you can claim a deduction that matches your marginal rate of income tax, and this deduction favours the wealthy.
The National Treasury’s proposal to change the deduction to a tax credit pegged at a rate of 30 percent will be very favourable for low-income earners, McLeod says. Anyone with a tax rate of less than 30 percent will benefit – but those on a rate of more than 30 percent will see their deductions reduced. However, McLeod says, the tax credit system will do little to benefit people who earn below the income tax threshold – R57 000 in the 2010/11 tax year if you are under 65 years.
‘NHI SHOULDN’T COST YOU MORE THAN YOU’RE ALREADY PAYING’
You should not be expected to pay more for National Health Insurance (NHI) than you currently pay for your medical scheme cover. This was said by Malebona Precious Matsoso, the director-general of the Department of Health, at a recent presentation on NHI to Parliament’s committee on health.
The government’s green paper on NHI says the 2005/6 Income and Expenditure Survey shows that medical scheme members pay on average nine percent of their gross income to belong to a scheme.
However, the percentage of income paid is skewed heavily in favour of higher-income earners, who may pay as little as 5.5 percent of their income. The poorest 20 percent of scheme members pay more than 14 percent and, in some cases, as much as 40 percent of their income to belong to a scheme, the green paper says.
The NHI system is expected to seek to address this imbalance and also to offer protection against high out-of-pocket medical expenses.
The treasury says it will release a discussion document on NHI funding shortly – possibly with the medium-term budget in October.
Dr Anban Pillay, the health department’s cluster manager for financial planning and health economics, told Personal Finance that most of the funding for NHI will come from the Department of Health’s regular budgetary allocation.
Only a small portion of the total amounts required for NHI will have to be funded by way of a compulsory NHI contribution, he says.
For the initial phases in which NHI will be tested, Pillay says, the government has donor and European Union support. The green paper indicates that NHI will be tested in pilot projects for at least the next five years.
Pillay says that if the Department of Health does not introduce NHI with its proposals to address the rising burden of disease, the government’s budget for health care will, with estimated increases for inflation, balloon to R205 billion by 2025 – and that is R50 billion short of the R255 billion required for NHI.
Spending on medical scheme contributions – R84.9 billion at the end of 2009 – will increase, and the total spend on health care through schemes and the health department will reach about R400 billion by 2025, Pillay says.
Once NHI becomes a viable alternative to medical schemes, it is likely that members will use NHI instead, Pillay says. Schemes will develop into products that provide complementary or top-up cover for those who want and can afford it.
The government will not close down schemes, he says.
Di McIntyre, a professor in the Health Economics Unit at the University of Cape Town, says in an article entitled “Can South Africa afford not to have NHI?” on Health-e (www.health-e.org.za) that the government spends 12 percent of its budget on health care and should increase this – as many African heads of state have agreed to do – to 15 percent of taxes collected.
Comments on the government’s green paper are invited until October 11, two months after the document was released. The Department of Health has confirmed that the third month of consultation is for it to review the comments it receives.