/ 25 January 2021

Funding a vaccine will tax our limits

Brazil Health Virus Vaccine
Rollout: Brazilian employees work on the production of China's Sinopharm Covid vaccine. (Nelson Almeida/AFP)

The treasury’s efforts to support the Covid-19 vaccine rollout could see taxes being raised. But South Africans will only know if these changes will affect their pockets when Finance Minister Tito Mboweni announces the budget at the end of February.

The treasury could not be drawn on further information. In response to questions from the Mail & Guardian and other media outlets, the treasury simply said: “Detailed financing measures, including any announcements on tax changes, will be announced on budget day in February.”

But this lack of detail has not stopped some from questioning whether higher taxes are a viable solution to the government’s problem of finding funds to pay for vaccinating the population. Some experts have warned that raising taxes will be too painful for an already overburdened tax base.

In an interview with Business Day last Sunday, treasury director general Dondo Mogajane said his department was considering several options to fund the vaccine, including raising taxes. 

Roshelle Ramfol, a senior lecturer in Unisa’s taxation department, said the country already has relatively high taxes.

“I know that there is a shortage of funding, but the tax burden is quite high on the South African taxpayer. So adding to that is not going to be favourable and taxpayers might not accept it.” 

Low trust in the government’s ability to manage these funds will probably play into taxpayers’ attitudes towards tax hikes. 

But, she added, because the vaccine could save lives and the economy, taxpayers could be amenable to any efforts to fund it. 

With a high unemployment rate and businesses struggling to survive under the current conditions, she said it would be difficult to find places where taxes can be raised without hurting taxpayers and affecting growth. “It’s almost like there is no space to squeeze,” Ramfol said.

The government might not have a choice but to increase taxes, said economics professor and researcher Ingrid Woolard, who served on the Davis Tax Committee appointed in 2013 to examine how the country’s tax system aligns with its economic growth. 

Earlier this week in an interview with the Business Day, retired judge Dennis Davis, who headed the committee, backed a one-off solidarity tax.

Woolard said the likely candidates for increases will be personal income tax, in the form of a solidarity tax, and the fuel levy, but value-added tax (VAT) is probably off the table. 

“It’s bad for growth. It’s not progressive. I don’t know how amid a recession you could think of raising VAT,” she said.

FNB senior economist Siphamandla Mkhwanazi said raising taxes in the current economic environment will be difficult. “In the corporate sector, a lot of companies only operated for a very short time last year because of lockdown. And even prior to that, activity was so low that corporate profits were already declining to today’s low demand environment.”

Because of this, the treasury may not be able to raise the amount of revenue it will need to fund the vaccine, Mkhwanazi said. 

“They would have to raise it by quite an aggressive amount … to get the kind of revenue they will be looking for. In this environment, it is unlikely.”

Kevin Lings, the chief economist at Stanlib, said asking South Africans to contribute more “when confidence is down, unemployment is up [and] people’s incomes are under pressure” runs the risk of doing too much damage. 

“I think the message to society will be that everybody is now under even more pressure. And I think that could hurt confidence at a critical time,” he said.

It would be preferable if the government were able to reprioritise expenditure to meet its commitment, Lings said. 

“Obviously it’s an absolute critical spend. There is no debate about that. The benefit will far exceed the amount of money being spent,” he added.

Lings said that on the face of it a wealth tax seems appealing. “But to me, the problem of the wealth tax is its implementation and the type of benefit you would receive. I think it ends up being a fairly expensive tax to administer correctly. I think you would end up receiving a relatively small amount of money within the scheme of South Africa’s tax base.”

Economist Busi Sibeko said progressive tax hikes, like the wealth tax, are the only option under the current circumstances. 

“Raising VAT will disproportionately impact the poor. And we don’t want to reinforce the austerity that is already happening.”

Sibeko agreed that the implementation of a wealth tax will be difficult and will take some time before it comes into effect. 

The treasury could consider implementing a resource rent tax, which would give the government a return on the extraction of the country’s mineral resources, she added.

“It really requires a feasibility assessment so that you don’t disproportionately impact vulnerable people. And I don’t know how they will do that in the next month.”