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When do tax rates become unaffordable?

The Minister of Finance must adopt a cautious approach.
South Africa's tax base is too dependent on too few people. Picture: Shutterstock

South Africa’s economic performance and outlook has remained under pressure throughout 2017. This has led to the country’s credit rating being downgraded to “junk status” by two of the three major ratings agencies. Reasons have been cited as to why SA’s credit rating has been negatively impacted this year such as the rising debt-to-GDP ratio and political uncertainty. The rising debt-to-GDP ratio is problematic as the fiscus is increasingly negatively affected as national debt rises. This is as a result of the increased interest burden that must be paid to creditors, which reduces the amount of money available to provide for the economy and its citizens.

On November 27 2017, President Jacob Zuma announced that steps were being taken to reduce the R40 billion budget deficit by reducing expenditure by R25 billion and increasing revenue by R15 billion. South Africa’s current tax brackets are listed in table 1 and the tax thresholds are listed in table 2:

Table 1

Taxable income (R)

​Rates of tax (R)

0 – 189 880

18% of taxable income

189 881 – 296 540

34 178 + 26% of taxable income above 189 880

296 541 – 410 460

61 910 + 31% of taxable income above 296 540

410 461 – 555 600

97 225 + 36% of taxable income above 410 460

555 601 – 708 310

149 475 + 39% of taxable income above 555 600

708 311 – 1 500 000

209 032 + 41% of taxable income above 708 310

​1 500 001 and above

​533 625 + 45% of taxable income above 1 500 000

Source: Sars

Table 2

Age

Threshold

Under 65

​R75 750

​65 an older

​R117 300

​75 and older

​R131 150

Source: Sars      

In 2016/2017, it was estimated that approximately 1.7 million taxpayers contribute 78% of all income tax collected. This is 35% of an approximately 4.8 million assessed personal income tax payers. If an increase in taxes is proposed, whether directly or indirectly, these taxes find their way to the consumer. Currently, the South African tax base is too dependent on too few individuals.

In a growing economy, the tax base would be expanded as a result of more people being employed and hence driving economic growth. Unfortunately, although that remains the long-term hope, in the short term it is more likely to come from raising taxes from taxpayers who are the higher income earners.

According to 21st Century, the median total guaranteed package of a formal sector employee is R19 955 per month. Assuming the whole salary is subject to personal income tax, the median salary employee would pay R2 786 per month in personal income taxes (14%). This seems fairly low, however, it does not take into account of a number of other taxes that consumer must pay with after tax earnings such as value-added tax (VAT), rates and taxes on home owners to name just two. Many taxpayers also currently provide or supplement their own services that citizens wish would be provided for by government such as adequate healthcare, pension and education. Using a basic example where the median salary employee provided their own medical cover, pension and had one child at school, they could face costs such as those detailed in table 3:       

Line Item

Cost per Month

Medical aid (with savings)

R 1 700

Pension (11%)

R 2 195

School fees*

R 2 666

Total

R 6 561

*Source: Business Tech (January 19 2017) 

Adding the costs in table 3 to the median salary earner’s personal income tax figure of R2 786 gives a total of R9 347. This yields an effective tax rate of 47%. This effective tax rate excludes other forms of taxes such as VAT, rates and taxes on homes, fuel levies, toll roads, among others. When all additional taxes are considered and adding all of these figures together would mean that the median formal sector salary earner (assuming the cost profile above) faces an effective tax rate significantly above 50%. This is a significant portion of an employee’s income before considering other personal costs such as housing, transport and groceries, for example. This assessment assumes that free and adequate medical care, pension and school fees are provided for by the government – as in most developed countries. It may seem unrealistic given current economic circumstances but it should remain the goal of government to provide such services in the long run.

The 2017/2018 budget speech will reveal where the additional R15 billion in revenue will be sourced from. If the tax ultimately finds its way on to the consumer (directly or indirectly), care should be taken not to overtax the consumer – as this can ultimately lead to a reduction in tax revenue collected as individuals find ways around paying taxes. When the tax burden becomes unaffordable because the consumer ends up with too little net income, the tax payer looks to ways of not paying taxes. The Laffer Curve in figure 4 illustrates how taxes rise as the tax rate rises to an optimal point before reducing once more as the tax rate exceeds the optimum point: 

The theory behind the Laffer Curve above formed the basis of former US president Ronald Reagan’s economic plan when he implemented one of the largest tax cuts in United States history. This adds further credence to the caution that must be taken by the Minister of Finance when deciding how the additional R15 billion in revenues should be raised. If the tax base is in fact already overtaxed, an increase in the taxes levied on consumers could lead to a further reduction in the total revenue collected.

Bryden Morton is executive director and Chris Blair is CEO: Leadership & Sustainability, at 21st Century.

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The Laffer Curve only makes sense when politicians (1) take a long-term view beyond their own time in office (2) care about the well being of the country as a whole instead of their own pockets. Neither is applicable to the current ANC government. Mark my words, in February we’ll see an increase beyond 45% in the top bracket and an increase in capital gains tax.

A 15% or 16% Vat rate would be more appropriate and more inclusive.
The 1.7 Million tax payers are already over-stretched and bleeding.

All this effort to cover up the never ending mistakes made by Mr. Zuma

Zuma did not make any mistakes.

Yes. Zuma did not make mistakes because it was all very intentional and planned.

Drastic tax cuts would boost the S.A. economy through making available additional discretionary funds being employed in the economy. Tax hikes will have a further negative effect on the economy. The shortfalls in the budgets of government and SOE’s is due to organised theft, poor management and duplicate spending. That should be addressed through efficiency turn-around management and cost savings, not through additional taxation and additional borrowings. Financial management 101.

Great article on how the government is already applying redistribution of wealth from the few to give away to the masses (and themselves). Pity they can’t wrap their heads around this article and then applying principles of sound financial management. Creative accounting is certainly an outcome by taxpayers in the future

Why include pensions in the effective tax rate calculation?

Would be great to offer further tax breaks for business owners/employment creators in nascent industries – Gov. wont lose any revenue because the business didn’t exist previously, but gain on potential increased employment. Perhaps for new simple IT services businesses and small scale manufacturing would be a good start for lower taxes/incentives.

It is the aim of socialism to create only one class of citizen. The Freedom Charter does not cater for different classes. Under ANC rule South Africa will have the few super-wealthy politically-connected elite, while the rest of the population will be struggling with starvation.
The combination of taxation and inflation turns the middle class into the working class and the majority into abject poverty.

“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” – Vladimir Lenin (among others)

A socialist country is a very hostile place for owners of capital and people with jobs.

Nowhere in the Laffer curve theory does it say that the ideal tax rate is the one that maximises the tax take. In fact, the most prosperous countries have tax have tax rates far to the left of this. Countries like Singapore have realised that low taxation, nurturing of the private sector, minimal red tape coupled with a small, efficient and honest government leads to high economic growth and prosperity for all. In summary, everything the ANC is not.

Singapore is set to become the country with the highest GDP per capita in the next couple of decades.

Not a fair comparison. The average IQ in Singapore is 108 (the highest in the world), in SA it is 77.

You are spot on! In South Africa you are taxed according to your IQ. The higher your IQ, the more you pay. The lower you IQ, the more you receive. This is why we have got such a small tax base.

Every year this time for the last 25 years or so we have this discussion on a vat rate increase.It’s never happened and things are unlikely to change.As usual individual taxpayers will get nailed.Seem to recall that many years ago company tax and income tax brought in similar amounts.Not any more,income tax collections are now about double those of company tax!

It is well established in the body of financial knowledge that taxes are a disincentive to productivity and thus to returns to all citizens. It is well demonstrated in the practicality of the real world that this is so.

It is also known that improved efficiency and effectiveness (the inverse of wasted effort, energy expenditure effectiveness and resource utilization) are respected and deliver improved return to taxpayers, being all of us (recall that we all pay VAT).

End of comments.

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