South Africa must do more than target the wealthy to reduce its deficit
Pravin Gordhan’s tax increase on high-income earners was a response to a growing budget deficit, declining revenue sources, and a limited pool of tax revenues. Finding the right balance of taxes for the budget 2017/18 proved to be a difficult task, according to Gordhan.
South Africa has a deficit of R28 billion, which is the amount by which its expenditure plans exceed its revenues. The minister must find a way to close the gap in the next two years.
Tax increases are the most reliable and obvious source of revenue for the government. Taxes had to be raised. The minister’s tax tools are limited, even within the tax area. This is because the tax base of the country is narrow.
Out of the 55 million South Africans, only 14 million have registered to pay tax. Companies and trusts are also taxed. The other half of taxpayers are not in the lowest tax bracket. In terms of direct income taxes, only 14%, including companies and trusts, fund government expenditure.
South Africa’s progressive tax system is in tune with the trend of increasing taxes on high-income earners. The basic principle of the tax system is that the higher your income, the more taxes you’ll pay. Taxation is based on the principle of progressivity, which is used in both developed and developing countries. However, some countries use it more than others. South Africa’s economic inequality makes this approach even more important.
Tax increases, especially for the wealthy, are not a viable solution. To reduce the deficit, it would be necessary to eliminate or reduce corruption and wasteful spending and cut government expenditure. The minister stressed the importance of fighting corruption but did not mention any specific measures to reduce government spending.
High-income earners squeezed
The South African government is not the only one to focus on wealthy individuals. Prior tax increases targeted wealthy individuals who were not necessarily high-income earners. In these cases, the focus has been on tax situations, such as when assets were sold, or dividends were paid out, or estate duty.
The focus this time was on the high-income earners. The minister has outlined a variety of taxes. The main ones were:
Personal Income Tax
The top rate of income tax on incomes above R1.5 million per year was increased from 41 to 45%. About 100 000 taxpayers will be affected. The revenue is expected to reach R4.4 billion during the 2017/2018 fiscal year.
High-income earners will feel the biggest increase. Other income earners are also affected. The minister attempted to ease the pain for lower and middle-income earners by adjusting their taxable income increases to take into account inflation. The net result is that people with low incomes will be worse off.
The withholding tax on dividends was increased from 15 to 20 percent. The tax is levied on dividends received by residents, non-residents, and corporations. Non-residents of countries with whom South Africa has tax agreements will be exempted from the tax. This tax will not generate much revenue because it only affects a small group of wealthy people who own shares in corporations – the same people who are affected by the 45% personal income tax marginal rate. The rate was increased in order to discourage those who would rather receive dividends than normal income. This increase will generate R6.8 billion in revenue.
These taxes are the “feel-good-to-increase” taxes. They are often seen as a way to curb bad habits such as smoking, drinking, and unhealthy eating. In reality, their main purpose is to increase revenue. The tax increases are higher than inflation, and they will bring in about R2 billion.
Fuel levies will affect both the rich as well as the poor. However, people experiencing poverty will be the most affected. Fuel levies will be passed on to consumers in the form of higher fuel and transport prices. This increase will generate revenue of approximately R3.2 billion.
Capital Gains Tax
In 2016, it was announced that the capital gains tax would be increased for both individuals and companies in 2017. Gains on capital assets, such as shares and houses, are subject to this tax. The tax rate for corporations has increased from 18,65% to 22,4% and for individuals from 13,65% to 16,4%. This could lead to taxpayers holding onto their assets and not selling them.
Value-Added Tax (VAT),
This is unchanged at 14%. Estimates said that a one percentage point increase would generate between R15 and R20 billion in revenue per year. The rate rate is like because increasing VAT is not a wise political move. Instead, it is a tax that is regressive and affects the poor more than those who are wealthy. A VAT increase would also increase inflation, as businesses would need to raise prices in order to collect the extra tax. An increase in VAT would exacerbate the slowing of the economy.
According to the minister, raising the tax on personal income over a prolonged period could negatively impact growth and investment. It’s also not sustainable to continue to squeeze taxpayers for government spending. As they are packed more, they will be more likely to take on debt to maintain their lifestyle. People may rebel by finding ways to avoid paying taxes.