SA has lost out on R180bn in forfeited taxes
The article “High earners an obvious target for tax hikes” listed several alternatives for increased personal income taxation. But the statement that personal income tax started to fall in the 1980s is wrong. The most important tax cuts took place between 2000 and 2005.
Between 1990 and 1994, the apartheid government increased taxes by not adjusting tax brackets for inflation.
During the two first financial years after 1994, a 5% extra “transition tax” was put in place for incomes over R50 000, but only for 12 months (bridging two financial years).
The 50% tax rate for income above the highest bracket was in place until 1995-1996, when it was lowered to 45%. The 45% tax rate was then again lowered over the 2000-2001 and 2001-2002 financial years, to 40%. It became 41% again last year.
From 2000-2001, the government started to make exaggerated upward “adjustments of tax brackets for inflation”. Most effective was the adjustment of the highest tax bracket by 33% (from R300 000 to R400 000) in 2005, when inflation was only 4%.
For a few years, the publication Tax Statistics has shown how personal income tax has fallen in the 2000s. The tax bracket adjustments above the rate of inflation between 2000 and 2011 are shown by a falling tax rate schedule.
Comparing the number of personal income taxpayers in different income groups, I calculate that the forfeited revenue from personal income tax in 2013-2014 alone, compared with 2004-2005, is about R180?billion. It is “forfeited” because this would be the tax revenue without policy changes. When it comes to personal income taxation, it is in my view politically possible to leave things as they are.
In Tax Statistics, the “constant” average tax rate in the personal income taxation system over the years is given as a sign of successful adjustment of tax brackets for inflation. It is, however, testimony to an over-successful “adjustment for inflation”. If the government only adjusts the tax brackets at the rate of inflation, the average tax rate in the personal income tax system would increase little by little each year.
The reason is the increasing standard of living among personal income taxpayers. To repeat: if the idea of how a certain lifestyle should be taxed is the same over the years (meaning the same tax policy), the average tax rate on all personal income taxpayers would creep upwards.
The public sector can in this way comprise a bigger and bigger part of gross domestic product, on average. The policy of “a 25% tax revenue-to-GDP ratio” was declared in 1996 and reaffirmed in Finance Minister Pravin Gordhan’s 2012 budget speech. Today this ratio is 27%.
Instead of fiddling with personal income tax in the 2000s, the government should have done nothing (besides adjusting tax brackets for inflation).
Higher education fees would have fallen and the government would find itself in a different situation today – likewise when it comes to financing public health and the National Health Insurance scheme.
Dick Forslund is a senior economist at the Alternative Information and Development Centre.