born free, taxed to death
January 29, 2013 in Uncategorized
With the budget speech approaching in SA, the public are usually invited to make some suggestions, so I figured I would make a few of my own. A bit of background first.
There are three main taxes in SA that make up the lion’s share of tax revenue. Personal Income Tax accounts for about a third of all tax collected. Company Tax is a little more than a fifth and Value-added Tax about a quarter. Together these three taxes account for about 80% of tax revenue.
More than 90% of Personal Income Tax is paid by just over 2.6 million people. That is less than 20% of registered taxpayers and about 5% of total population. Likewise more than 90% of Company Tax is paid by about 5% of tax-paying companies. That’s an awful lot to ask from far too few.
So, the tax base is obviously too thin.
This is partly due to the inequality of wealth and income in SA, which would present a problem regardless of who ruled the roost. The idea that you could get substantially more tax out of those overburdened 2.6 million people, simply by increasing the tax rates, is debunked by variations of the Laffer curve, (which suggests diminishing returns as tax rates increase and that at extremely high rates, total tax revenues actually decrease). So there is probably no future for the social aspirations of the South African dream without a broadening of the tax base. Herewith then, a couple of suggestions:
VAT is a good tax, in the sense that it is equitable, because its incurred in ratio to your spending, and in the sense that its harder to avoid, provided you’re more inclusive on vendor registrations, which I also recommend. My first suggestion is to increase VAT collections, by increasing the standard rate of this tax and limiting zero rating or imposing a second-tier rate in its place. So I’m talking about say a 15% standard rate and say 5% on previously zero-rated goods and services, with the exception of exports which would need to remain unaltered. Since everybody spends, if all vendors are mandatorily brought into the VAT system, then increasing the rate and clipping exceptions would go a long way towards broadening the tax base.
Personal Income Tax is quite correctly charged on a sliding scale, since the ability to pay is relevant to the question of how much tax you can levy. But it occurs to me to wonder how millions of people can afford to pay union dues, for instance, but absolutely cannot afford to pay any tax, none at all. If there are hard choices to be made, state coffers surely deserve preference to union dues. And this is mostly the same segment of SA that is currently enjoying greater than inflation wage increases, year after year. So there does appear to be some space at the lower end of the tax tables for small increases in tax rates, broadening the tax base by bringing those millions of registered taxpayers who currently pay little or no income tax more firmly into the tax net. Even if each pays a small amount, their sheer numbers would make a material difference to tax revenues collected.
The current discussion surrounding a “mining tax” is alarming. Certain industries punch above their weight in terms of their contribution to our prosperity. Mining and farming spring immediately to mind, since they are each the unique entry point to a much greater value-added and procurement chain, as well as having quite an impact on our current account(foreign exchange). While I am not directly linked to either industry, my enlightened self-interest screams against burdening such core industries with a tax greater than that endured by the rest of us.
Why? Because, as the saying goes: If you would have less of a thing, tax it.