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An Economic Advisory Council appointed by President Cyril Ramaphosa has proposed a series of tax increases for South Africa amid the economic recession and declining tax revenues.
SARS Commissioner Edward Kieswetter said he expects a tax revenue shortfall of around R300 billion this year.
This is in line with Finance Minister Tito Mboweni estimates in June that government revenue will be 304 billion rand less than budget estimates.
Considering that the planned introduction of a basic income grant in South Africa could cost R243 billion a year, tax increases will be needed to finance the increasing public spending.
The Economic Advisory Council, therefore, recommended increases in taxes on fuel and wealth and a three-year “solidarity tax” that would increase income tax for those who earn more.
These tax increases echo comments made by National Treasury Chief Director Edgar Sishi in July.
Sishi said the National Treasury is considering new fiscal measures as the government seeks to raise an additional 40 billion rand through tax increases in the coming years.
He said they were considering investigative reports from the Davis Tax Committee on new measures, including the feasibility of a wealth tax and how it relates to a land tax and estate tax.
Taxing the rich is politically favored, making a limited duration solidarity tax a clear possibility.
What the experts say about tax increases
Tax increases do not always result in higher tax revenues, especially in countries like South Africa, where the tax burden is already high.
The well-known Laffer curve theory of economist Arthur Laffer, for example, illustrates that lowering tax rates can increase total tax revenues. The reverse is also true.
To get an opinion on the local scene, MyBroadband asked two experts, Efficient Group Chief Economist Dawie Roodt, and Economist Mike Schüssler, for their comments.
Roodt said the effectiveness of the tax increases will depend on the type of tax, how long it will be in place and what the rates will be.
If, for example, there is a single large “surcharge” on personal income tax in a month, it will be difficult to put measures in place to avoid the tax and much of it will be collected.
However, if it is a smaller percentage increase over time, it will allow time to evade that tax and could result in lower tax collection, which is already the case.
“The bottom line is that, at best, you can only get additional income in the short term. In the longer term, less is likely to be collected, ”he said.
Schüssler said the South African tax burden is already very high. “We are among the 12 highest tax countries as a percentage of GDP,” he said.
As a result of the high tax rate, many companies avoid investing in South Africa, resulting in slow economic growth.
Personal income taxes on GDP are also one of the highest in the world, while VAT revenues are found in the top half of countries.
“This is unsustainable as people who pay taxes get very little in return, they have seen waste, corruption and high government salaries,” said Schüssler.
He said raising taxes further will make people seek to leave South Africa or work less.
How to improve South Africa’s economy
Roodt said there are only a few ways to improve the country’s economy, and raising taxes is not one of them.
He said South Africa can expect some kind of windfall such as a rise in the price of raw materials, or it should spend less.
“I’m not holding my breath for strong economic growth, which leaves only one option and that is to cut spending drastically,” Roodt said.
However, spending less will be politically very difficult and in fact further depress economic activity in the short term.
“We have run out of options,” Roodt said.
Schüssler echoed Roodt’s views, saying there should be a strong focus on cutting public spending. This, he said, should include:
- Reduce the total government wage bill by allowing only small increases for a decade to government employees.
- Reduce government departments to 15 maximum.
- There is no bailout for state companies unless they have made money in normal times. This includes the closure of SAA.
- Make UNISA the university that government-funded students go to, and only them.
- Impose a three-year moratorium on strikes in critical industries.
Schüssler said the government should also get other revenue now by doing the following:
- Sell government-owned forests and get rid of the plots by selling them to farmers of color.
- Free the airwaves, sell the spectrum and sell more broadcast licenses.
- It sells the radio and television stations of the SABC.
Schüssler said South Africa has run out of money and any additional pressure on the private economy will slow down the recovery.
He said that unless the government is realistic about the economic crisis and finds adequate solutions, we will see further destruction of jobs with the young and wealthy leaving the country.
Personal income tax rates
The table below, courtesy of Trading Economics, shows that South Africa currently has one of the highest marginal personal income tax rates in the world.
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