It is clear that the effect of the increase in VAT on the poor will not be limited by the existing zero-rated items
ECONOMY
This week the minister of finance tabled a budget that will, in his words, “cause economic discomfort”. At the same time, it is not clear that the budgetary trade-offs made will either protect the integrity of the public purse or contribute to bringing about a “decent standard of living, access to economic opportunities and opportunity [for people] to pursue their dreams”, as the minister claimed.
The changes to the taxation regime are particularly disturbing. The increase in value-added tax (VAT) — from 14% to 15% — along with the 6% to 10% rise in excise duties and the 52c-a-litre increase in the fuel levy, will place great strain on poor and low-income South Africans.
In justifying these decisions, Malusi Gigaba misled South Africans in many respects. He would have us believe that, of the three major tax instruments available — personal and corporate income tax and VAT — an increase in VAT was the best one to raise the necessary revenue while advancing a growth-enhancing and redistributive agenda.
He stated that the VAT increase was unavoidable. We disagree. Here’s why.
VAT is a regressive tax
It is widely recognised that taxes on goods and services (such as VAT) are regressive tax measures because they are charged irrespective of how much somebody earns. This is different from personal income tax, where those earning more face a higher tax rate.
Naturally, because wealthier South Africans earn and spend more, the majority of VAT revenue will come from them. But the ability of different income groups to afford the extra tax differs, as does the share of their monthly budget spent on such taxes, with important consequences for poverty and inequality.
It is also not true that VAT places a greater relative burden on the wealthy — in fact, lower earners spend a greater share of their income on such taxes. The lowest-earning 10% spend 13.8% of their disposable income on VAT and excise duty, compared with the 12.6% spent by the highest-earning 10%.
The impact of the VAT increase will not be limited by the existing zero-rated items
The tax increases noted will disproportionately hurt the poor — in particular, poor black women.
Although he acknowledges there will be some negative effect on lower-income households, the minister argues that the current zero-rating of 19 basic food items, such as maize meal, brown bread, dried beans and rice, will “limit the impact on the poorest households”. This is misleading.
This does not take into account the actual consumption patterns of poor and low-income households. It rests on the assumption that the consumption baskets of low-income households comprise primarily zero-rated foods, and therefore that the effect of raising VAT on all other goods will be limited.
Contrary to this, the Pieter-maritzburg Agency for Community Social Action’s food price barometer shows that low-income households spend proportionally more on foods subject to VAT than on zero-rated foods.
The agency also indicates that, as fuel prices increase, lower-income households move away from zero-rated items such as beans, because they take longer to prepare. This means foods subject to VAT may come to form a larger proportion of the monthly household food basket.
It is clear that the effect of the increase in VAT on the poor will not be limited by the existing zero-rated items, as the minister would have us believe.
Increases in social grants will not partially offset the VAT increase
The minister would also have us believe that increases in social grants will help to limit the effect of the proposed increase in VAT. But the old-age pension grant will go up (until October 2018) by only 5.6%, an amount barely above inflation.
Considered with the increases in VAT, excise duties and the fuel levy, and the fact that inflation faced by the poor is higher than overall inflation, the most vulnerable households will probably see a fall in their spending power.
Personal income tax has not increased much in recent years
The minister justified the VAT increase partially on the grounds that personal income tax has increased significantly in recent years. This is not the case. In line with international trends, South Africa’s top marginal tax rates were reduced gradually from 60% in the late 1970s to 40% in 2002. In 2015, the rate on all brackets increased by only one percentage point, and 2017 saw a new top marginal income tax rate of 45% being introduced for those earning above R1.5‑million.
Even these increases have been partially or fully offset by other measures to reduce taxes paid by the wealthy. For example, the increase of the four highest tax rates by one percentage point was, on aggregate, neutralised in the 2015-2016 budget. This was because the tax rebates for private medical insurances, which primarily benefit wealthier households, were increased, resulting in no real change in revenue from personal income tax in that year.
Changes to tax brackets have had a similar effect. In 2005, when inflation stood at 4%, the top tax bracket was raised from R300 000 to R400 000, or by 33%, excluding many people who should have fallen into the highest bracket.
In addition, because of aggressive tax planning on the part of the wealthy, more and more of their income is being disguised. Examples of this include setting up shell companies, putting money in overseas bank accounts in countries with lower tax rates, and taking part of their compensation in stock options.
These changes in personal income tax since 1990 have undermined the progressivity of the tax structure. In democratic South Africa, the rich and middle class have paid less tax.
Our corporate tax is not high by international standards
Unfortunately, the minister also misled South Africans by claiming that corporate income tax is high by international standards. The World Bank’s Doing Business index shows our corporate taxes are below our emerging-market peers and are the fifth-lowest in Africa.
According to the Deloitte accounting firm, corporate income tax is a significant but declining revenue source. In the late 1970s it accounted for 41% of tax revenue brought in by the government, versus 18% in 2016.
Increasing the corporate income tax rate by just two percentage points to 30% could have raised about R15‑billion.
Wealth is undertaxed
Despite wealth inequality in South Africa being extreme — the top 10% of South Africans hold at least 90% to 95% of its wealth, and the top 1% holds 50% or more of its wealth —taxation on wealth, or income from wealth held, is low.
Capital gains tax, for example, raised only R17‑billion in 2016-2017, a mere 1.5% of tax revenue. Because not all capital gains are taxed, in 2017, individuals paid a rate of only 16% on capital gains and companies 22%, well below general income tax rates.
Gigaba raised tax on inheritances (estate duty) from 20% to 25%, but only for estates over R30‑million. In South Africa, such tax revenue is worth only 0.05% of gross domestic product, compared with the Organisation for Economic Co-operation and Development average of 0.2%.
South Africa has no annual “net wealth tax”, which would tax the total value of wealth held in a given year.
Considering that large amounts of wealth were accumulated under apartheid, that this wealth is passed between generations and that black earners have fewer assets to begin with and must support a higher number of dependants, these low taxes on wealth are indefensible and perpetuate inequality.
What Gigaba could have done
Gigaba, instead of misleading South Africans into believing that there was no other choice but to ask them to accept an increase in VAT, could have presented a very different tax policy. This policy would have ensured increases in personal income tax, particularly on the very wealthy, moderate increases in corporate income tax, and new or expanded taxation on property and wealth, and remove tax breaks benefiting higher-income earners.
More zero-rated VAT items should have been introduced and a higher rate of VAT should have been charged on luxury goods such as yachts and fancy cars. Such changes could have been tax-neutral.
The proposed tax measures are a step backwards in our attempt to advance towards a more equal and just society.
Thoko Madonko is a civil society budget activist. Dr Gilad Isaacs is the director of the corporate strategy and industrial development research programme at the University of the Witwatersrand