By David Warneke, Head of Tax Technical, BDO South Africa
By looking to personal income tax in large part to raise the target amount of R28 billion, the Minister has again chosen the line of least resistance. The least distortionary way of raising this amount of tax would have been by increasing the standard VAT rate by 2 percentage points to 16%: moreover, South Africa has a relatively low standard VAT rate by international standards. The main problem with an increase in the VAT rate, however, is that it would have been unpopular with trade unions as it appears to be generally viewed as regressive, despite the Davis Tax Committee’s finding that it is ‘mildly progressive’.
The effects of such an increase in the VAT rate on poor households could have been mitigated by increases in social grants. Even after such mitigating measures, the net tax take from a 2 percentage point increase in the VAT rate has been estimated at R30 billion. Instead, the Minister chose a combination of personal tax increases (R16.5 billion), an increase in the dividends tax withholding rate from 15% to 20% (R6.8 billion) and an increase in the general fuel levy of 30 cents per litre (R3.2 billion) to account for the bulk of the shortfall. It is curious that although an increase in VAT rates is anathema to the trade unions, little has been said by the unions about the increases in the general fuel levy over the past three years. In total over this period, the increases in the general fuel levy have raised more by way of indirect tax than would a 1 percentage point increase in the VAT rate.
A recurring theme from the Budget is the reinforcement and strengthening of the progressive nature of the tax system. In keeping with this theme, included in the proposals is the introduction of a new ‘supertax’ bracket of 45% on taxable incomes above R1.5 million. This bracket is expected to apply to roughly 100 000 individual taxpayers and the increase in the top marginal rate from 41% to 45% is only expected to raise R4.4 billion in additional revenue.
The danger in applying such high tax rates to the highest earners is that South Africa is extremely dependent on their skills and tax money. The psychological effect of a 4% increase in the top marginal tax rate should not be underestimated. The 100 000 or so individuals who fall into the top marginal bracket of 45% are expected to contribute in total over 26% of all personal income tax payable in 2017/2018. South Africa can ill afford to provide high earners with disincentives to work or, worse, incentives to emigrate. Such individuals tend to have the greatest skills and therefore the greatest potential mobility.
It is a mistake to compare, at face value, the top marginal tax rates of first world countries with the proposed supertax rate of 45%. For example, the UK’s top marginal rate is 45% and it applies to taxable income in excess of 150 000 pounds per annum. There is widespread perception that, unlike first world countries such as the UK, taxpayers in the highest brackets in South Africa receive very little return for taxes paid. One cannot compare the public infrastructure, goods and services provided by first world countries with that provided by South Africa. Once taxes are perceived to amount in effect to a penalty for choosing to live in South Africa, we as a country are in real trouble.
It is also a mistake to believe that potential investors in South Africa view our relatively high but competitive headline corporate income tax rate of 28% in isolation. The corporate rate would be considered by potential investors in conjunction with the rates of other taxes in our system such as dividend tax rates and personal income tax rates: the latter since expatriates would be subject to the personal income tax rates.
In short, the introduction of the supertax bracket may well stunt the growth of tax revenues and economic growth in the longer term and is not worth the relatively small anticipated return of R4.4 billion in fiscal 2017/2018. It will also lead to an increase in the tax rate applicable to non-‘special’ trusts to 45% and an increase in the dividends tax rate from 15% to 20% to close the arbitrage gap between corporate and individual income tax rates. Unfortunately, experience shows that income tax rates are ‘sticky downwards’. Undoing the supertax bracket may prove difficult once it is implemented.
On the other hand, there was precious little in the Budget to assist in growing the economy by way of a reduction in tax rates or incentives to excite local or foreign investors. On a more fundamental level it is highly problematic that the imposition of higher taxes, whatever the choice of taxing instrument, could almost certainly have been avoided if corruption and inefficiency in Government spending had been curtailed. It is certainly hoped that Government abandons its philosophy of imposing ever-increasing income tax burdens on the relatively small number of high earners, on whom our tax system so heavily depends.
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