With the 2021 Budget just around the corner, finance minister Tito Mboweni will be focusing on how to increase taxes at a time when the economy needs a huge dose of oxygen.
The focus will be on raising additional taxes where possible, cutting expenditure, but there is precious little room for manoeuvre.
As many have pointed out, SA is on the downside of the Laffer Curve – meaning any attempt to raise taxes will likely result in lower tax receipts. This is already evident in the high rate of emigration among those with skills, a trend that is likely to continue so long as government continues to tap the wealthy and the middle class for the bulk of its tax revenue.
As we pointed out in this article, just a handful of South Africans contribute to the personal income tax pool. In terms of the 2020 Budget Review, roughly 90% of the income tax payable by individuals are paid by the middle-class and above. The ultra-poor – those earning below minimum wage – now account for 9 million South Africans, a figure that has grown alarmingly since 2017.
It’s clear that the current economic policy model for SA is just not working, and Mboweni is all too aware of this. Sooner or later, the government is going to have to adopt a far more pro-business slate of policies to stimulate growth.
As for the 2021 Budget, rather than another raft of tax increases we are more likely to see further increases in government borrowing – which is already heading into dangerous territory as debt now exceeds 80% of GDP.
One of the big additional costs this year is the Covid vaccine roll-out, expected to cost more than R20 billion.
The alcohol and cigarette bans last year blew holes in the government’s budgert, costing an estimated R1.25 billion a month in lost excise and taxes – and double that on alcohol.
The cigarette ban was an outright disaster, resulting in the black market now accounting for roughly 40% of all cigarette sales. This will probably take years to fix – if it is fixed at all.
According to Stats SA figures, the scale of the 2020 lockdown was brutal for many sectors: 67% of construction companies temporarily ceased trading during the Covid- 19 period, 60% in trade, 54% in agriculture, hunting, forestry and fishing, 47% in community, social and personal services, 44% in electricity, gas and water supply, and 38% in manufacturing.
These sectors have to be nursed back to health, and will not be substantial tax contributors in the foreseeable future.
The options facing Tito
What other options are available to Mboweni:
- Raising VAT to 16% or even 17% – this is politically dangerous asit impacts the poor more than the wealthy, so this is likely not an option,.
- Introducing a digital services tax as is happening in France – this will take some time to implement as it will need to be coordinated with other countries as it involves cross-border transactions.
- Delia Ndlovu,MD of Africa tax and legal at Deloitte Africa, argues that the cost of tax compliance for small businesses remains a challenge, particularly as this is the real engine of job creation in the economy. “Addressing this issue, in conjunction with other measures, such as tax incentives or tax breaks for small and medium-sized enterprises, would reduce the cost of doing business and aid this important segment of the economy. For example, South Africa could lower the cost of doing business by automating registration and filing processes.”
- The much-discussed “Wealth tax” – this may be a popular move with the have-nots but it carries with it considerable risk of driving away that segment of taxpayers actually creating wealth and jobs for the country. A point often overlooked in discussing this is that the wealthy are the ones who create jobs in an economy.
- As Saica points out in this article, it is important for government to fix the tax legislation and avoid incomplete solutions: This is a broader concept than trying to avoid “loopholes” in the existing legislation. For example, estate duty within South Africa is arguably currently an incomplete solution, because of the lack of an estate duty “exit tax” (unlike the capital gains tax “exit tax”), if taxpayers emigrate shortly before the likely incidence of estate duties, and the lack of alternative taxes to mimic estate duty in the case of generation-skipping trusts. In addition, increased taxes with a future effective date can encourage avoidance behaviour such as shifting businesses offshore or emigrating. Should the government plan to introduce new taxes, this needs to be done carefully, to ensure that the new tax legislation does not inadvertently result in lower tax collections.
These are some of the tough choices facing Mboweni. He had better demonstrate government’s commitment to cut back on spending and reduce the size of the bloated public sector. If he does not, he could be facing some form of tax revolt (which will be hidden rather than disclosed). More skills will leave the country. Non-compliance may spiral out of control. That’s a very real possibility.
Or he could pull the country back from the brink and lay out a very clear plan for economic recovery and a simpler tax system that stimulates small business growth – which is the only proven way of increasing tax revenues over time.
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