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Tito Mboweni’s Everest moment: taxes must go up

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A recent Bloomberg survey shows SA has a ratio of tax revenue to GDP of 26% compared to a global average of 15%.

Bloomberg also reports that the budget deficit for the current fiscal year will probably reach an astonishing 16% of GDP, the largest since 1914. That’s according to a survey of 23 leading economists.

The economy is likely to contract 8-10% this year.

There’s no other way out for Finance Minister Tito Mboweni, who has little option but to announce further tax increases from February 2021. One of these options is a wealth tax which, if introduced, is likely to accelerate capital flight from the country.

The Laffer Curve principle suggests you can only squeeze so much tax from a pool of taxpayers. There comes a point at which any increases in tax rates results on lower tax receipts. It becomes self-defeating. Those with wealth will be more likely to look at tax arbitrage opportunities abroad.

Independent economist Mike Schüssler, speaking to Moneyweb, says South Africans are carrying too much of a tax burden as it is. SA already has the 10th highest personal tax rate and seventh highest corporate tax rate in the world.

President Cyril Ramaphosa’s advisory panel has suggested alternative sources of tax revenue, such as increases in the fuel levy and estate taxes. There’s also suggestions of a three-year “solidarity tax”, an increase in Vat and carbon taxes. You can be sure Mboweni will be looking at every available source of revenue.

He will also have to finally embrace the need for austerity. The cabinet is likely to announce plans to cut spending by R230 billion over two years , but this kind of austerity is going to face stiff opposition from trade unions.

There is going to have to be a reckoning with labour unions pushing for increases in the midst of an economic crisis, bearing in mind the public sector wage bill has escalated 40% over the last 12 years.

Apart from wage demands from public sector workers, Mboweni will also be facing calls from state-owned companies such as SAA and Denel.

One study from Wits University’s Southern Centre for Inequality Studies together with the World Inequality Lab says a wealth tax on the richest 354 000 individuals in SA could not only raise as at lease R143 billion, the revenue raised from it could be used to address income inequality in the country, which is the highest in the world.

Mboweni releases his supplementary budget on Wednesday 28 October. This is undoubtedly going to be one of the most painful in SA’s history.